Market Cafe: Shiv Sehgal explains how investors should prepare for a boom cycle and more

In the fifth episode of CNBCTV-18's hit show Market Cafe, Surabhi Upadhyay speaks to Shiv Sehgal, head of capital markets at Nuvama, about what could worry the market, the current geopolitical tensions, what signs should investors read, the global debt market, which sectors to track and how to prepare for the "boom cycle".

Surabhi Upadhyay: Hi, folks, and welcome to another edition of the CNBC-TV18 Market Cafe. I'm your host, Surabhi Upadhyay. I hope you folks have had a great week. So, I must admit that there are a lot of concerns that one is dealing with of late. There's the unfortunate situation that's playing out in the Middle East. And then over the last few weeks, actually, the last few months, you would have been hearing a lot of chatter around high US interest rates, surging US bond yields, particularly the US 10-year yield. So I thought it's a good time to call someone who understands these things and who can kind of demystify or simplify them for us and help us connect the dots. My guest on the show today is someone who travels a lot. He looks at the global debt markets very, very carefully, and speaks to a lot of foreign investors while having a Hawk-Eye on Indian equities right here at home. The guest I'm speaking about is Shiv Sehgal, who's the head of capital markets at Nuvama. Shiv, let's get started. So, firstly, thank you so much for taking the time and putting in the effort to come all the way over here. I know it's a busy day, but I really appreciate it.

Shiv Sehgal: No, thanks, Surabhi, thanks for inviting me.

Surabhi Upadhyay: And it's a refreshing change, I must say, usually we are in we see you in your black suits and stripes. This is nice and relaxed ambience and I quite like it.

Shiv Sehgal: Yes, I am feeling relaxed. So thanks for that.

Surabhi Upadhyay: Awesome. I think our, you know, coffee will be arriving shortly. But as we get started, you know, I just thought it's a good time to sit you down. Because I know that you deal with a lot of foreign clients, you do a lot of travel. And over the last one or two weeks, I think the market is completely overtaken by concerns which are not emanating from here, from India. These are global concerns that we're talking about.

Shiv Sehgal: Absolutely.

Surabhi Upadhyay: So let's start with what's happened in the in the Middle East. And that's top of mind right now. Geopolitics, can that be a real worry for markets?

Shiv Sehgal: So Surabhi, firstly, what people in the audience needs to realize is that, you know, we have had a pretty benign environment in terms of geopolitics, right. I mean, the last century, we had two world wars, India became independent in 1947. And then post that we saw, almost within 25 years, India fighting three or four wars, right. And that's very close to home for me, because my father was in the Indian Army, he actually was in infantry. So he fought, he fought all the three or four wars. And, you know, I know, from, you know, the stories that dad used to tell us when I was growing up, you know, the horrors and the cost of socio economic, economic and the human lives, that war causes on both sides of the fence. Yeah, right. And then, of course, the world that we are in, in this decade, or this century, you know, the war conflict has moved towards more towards terrorism and different kinds of war. Right, the cyber terrorism, you know, our most part of the whole post the Second World War, it was all about the cold war between the US and Russia. Right. So from a geopolitical environment, I think we have been lucky.

Surabhi Upadhyay: Not new that in that sense, we kind of live with them.

Shiv Sehgal: Absolutely.

Surabhi Upadhyay: Actually, I think a lot of people and experts also say that wars, start fueling economic boom, because there's that much more construction. I mean, that's traditional economic theory. Right. But why I'm asking is that in recent memory, we all know what happened in 2022, the Ukraine conflict, and the markets were affected?

Shiv Sehgal: Yep.

Surabhi Upadhyay: Would you say that was an aberration, because one of the parties involved was also a very big oil producing country. So basically, my simple question is, should we be concerned about this conflict in the Middle East?

Shiv Sehgal: So Surabhi again, very rightly said. So I think, I would put it in three buckets. Right. Why is war an important element from a market perspective? Right? The way you you need to bucket that is, is the conflict, gonna give tension to natural resources? The second bucket is economic activity. Right? And the third is the escalation element to it, right?

Surabhi Upadhyay: Wider escalation

Shiv Sehgal: Wider escalation, right, so for example, when Russia Ukraine happened, it embroiled the entire Europe, there was a Russia, China ally. Right. So there was an escalation concept to it. And what I would also bucket is that the escalation from a nuclear nuclear weapon perspective as well.

Surabhi Upadhyay: There was a possibility.

Shiv Sehgal: Absolutely. But when I look at, you know, the recent development that happened in Israel and Hamas, right. To me from an economic activity point of view it is an isolated event, from a large economic base. Right. It is not a large trade center from that perspective. Yes, it is important. It is important in terms of how much it can escalate in the Middle East. Who does Iran side with who does Saudi Arabia side with. And, from a natural resource point of view. You know, there is not really that element there. There are peripheries that are embroiled in oil production, right. But it is not a direct element to it. And the other thing which is very important is if there is an known unknown. When Russia Ukraine happened, it came out of the blue. Right. Nobody was expecting that. It was not in anybody's radar. Here there is a region which has been in constant conflict since the time it got independence. Right. So there is also an element. Yes, there is a conflict element. We went through a period where things were benign, it has taken Israel by surprise. And of course, any escalation has concerns of its own, but I think, like Russia Ukraine war is still going on but we are not talking about it anymore. It has become a known unknown. And I think, fast forward, within a couple of weeks from now, in my mind, I don't think this will escalate into something serious but what is happening at the moment is terrifying.

Surabhi Upadhyay: The humanitarian sort of issues that are unfolding are massive, and they're really heartbreaking. And we really hope for humanity’s sake that this really draws to a close. But okay, so what you're saying is from a stock market or in general marketplace, financial market perspective, maybe markets will just move ahead and learn to live with this one.

Shiv Sehgal: Absolutely.

Surabhi Upadhyay: So then let's talk about the other trouble, right, that we've been speaking of, and that is higher US bond yields. Now, I want you to really simplify this for a lot of our viewers who might be new to stock markets as well. First of all, why should we be worried if interest rates are high in the US?

Shiv Sehgal: Okay, so that's a great question, by the way.

Surabhi Upadhyay: And it's investing 101 here on Market Cafe?

Shiv Sehgal: No, so let me try and simplify it. I think, you know, the world that we live in, right, there is a cost of capital to everything that we do from the coffee that we are drinking to the production that's happening, right. To everything that you do, you drive your car, the oil price, everything is dictated by the cost of capital, or cost of doing business. Now, every element there is dictated on the fact that what is the cost of borrowing for that business. Right, money is not free, right. However, saying that we lived, I think 2008 was a watershed moment in terms of financial markets. When 2008 happened for the first time, right. I think the entire financial market was in such a big turmoil that the central bankers that weild the power decided that we cut rates to zero for the financial system not to collapse, right. But now what happens is once you give the cool aid, right,

Surabhi Upadhyay: The cool aid?

Shiv Sehgal: Yes, the cool aid, I call it the cool aid, which was zero interest rates. Absolutely. Right. So basically, you made money free, right. Now when you make money free, right? It's good, because it avoided the collapse at that point of time. But what is surprising to me, right, and I'm a good anecdotal student of financial markets and history right. FED kept the interest rate zero for seven years. Right. And that percolated into other problems, it equated into a NASDAQ bubble, it perculated that into, you know, a private equity bubble it percolated right into a crypto bubble, like money will flow right into where it finds its best value and best yield. And COVID. On top of all this was another event that happened,

Surabhi Upadhyay: And then again you had no interest. Well, what do you do we have to, you know, pump prime your way out of this crisis?

Shiv Sehgal: Absolutely. So you had both monetary and fiscal Yeah. Right. Basically providing you these massive cushions...

Surabhi Upadhyay: Cushions of liquidity.

Shiv Sehgal: Absolutely. Right.

Surabhi Upadhyay: You travel to the US as well, right? I don't hear people that bearish on the US economy just yet. Yes. There's been talk about some rumblings in the banks, etc. So that's my first question, whether you really that concerned that we're going to see an economic meltdown or central business meltdown in the US. And second, while there is a moral argument about free money pumping up markets. And we've seen enough on some great documentaries on already platforms that I love to watch about what happened in 2007. But financial markets love free money. And no one argues as long as the price of stocks and bonds and you know, crypto and crude, it all goes up. No one has a problem in the financial markets. So then why should we worry?

Shiv Sehgal: Surabhi, again great question, by the way. And let me rephrase that by saying why we should be worried. Yeah. Right. The answer to your point is that from 2008 to 2021, we lived in free money. Right? That regime has changed. Right. And I'll give you some anecdotes and some statistics for the for the audience, right. Global debt today, as we stand is $367 trillion. Right? Pre GFC, or global financial crisis that we call, in 2007, right, that number in terms of US, since you asked the US question. US debt, as we knew as national debt today is $33 trillion in 2008. Right, that number has gone 3x.

Surabhi Upadhyay: So from 2008 to now, now...

Shiv Sehgal: US debt has gone by 3x. Yes, the refinancing has to happen, right? You cannot borrow money for perpetuity right. either you borrow it for five? Well, if you have a home loan, you bought her for five years, 10 years, 30 years, right. But it all comes up for refinancing. Correct. So the refinancing cycle in the western world is about to happen in the next two, three years.

Surabhi Upadhyay: And now the cost of refinancing is some 4.5 or whatever. 4.8%. That's the US 10 year bond yeild

Shiv Sehgal: Absolutely right. I don't think that we go back to the regime where interest rates are going in the near term anyway to zero to 1%. So there's refinancing, right. This $33 trillion, right that the US government owes. Till about a year back that cost was $300 billion to furnish the debt? Okay? Right? As we stand today, that number is $970 billion, right? That they need as interest expense to keep the deficit going. And if interest rates continue to balloon higher, that number only becomes higher and higher

Surabhi Upadhyay: Just to conclude this point, bubbles burst for a reason. Bubbles can go on for years, right? And then there comes some point or some event, which breaks that bubble, correct. In 2007, because I was around I was covering financial markets. I remember that was a subprime market, the moment home prices started dropping in the US, all these fancy bankers who are, you know, package these securities, mortgage backed securities, and you're making huge money out of leveraging them. The whole thing came crashing down. Yeah. So it was the fall in the real estate market that prick the bubble. Any sense of what could prick it this time?

Shiv Sehgal: So the way I look at it, the only two reasonable scenarios, outcomes, like markets are all about probabilistic. Right. So I can, I can simplify it for your viewers. Right. One is that the slowing economy actually has a tipping point, and it goes into a proper recession. Okay, right. That's first element, in which case, as you rightly said, the FED will cut rates and come to the rescue, right? The second scenario is the yeilds the US keep rising, right? And it actually percolates into another financial crisis.

Surabhi Upadhyay: Just very high yields.

Shiv Sehgal: Absolutely.

Surabhi Upadhyay: Like some of the examples we had around April or so when these mid-size US Bank started failing?

Shiv Sehgal: Absolutely. Right, right. So those were the only two scenario that I can see, the third scenario is that we continue to muddle through, right? In a very slow moving economy, global growth is weaning off, right. But there comes a tipping point where when the refinancing issues, the real estate issues in the US, right actually cause a inflection point. And we see these anecdotes come playing out in the US.

Surabhi Upadhyay: Okay, let me tell our viewers this guys, you probably think what's going on this is such gloom and doom talk, the world is coming to an end, but hang on, the person who's sitting before me is very bearish, no doubt on the way this global debt picture is shaping up. But at the same time, he is super bullish on India, aren't you, Shiv?

Shiv Sehgal: I'm super bullish on India, India finds itself in an aging world, in a indebted world, in a very sweet spot for the five Ds that we at Nuvama have refined for the last few years. Right?

Surabhi Upadhyay: 5 Ds? This is why you think India is in a great place.

Shiv Sehgal: Absolutely.

Surabhi Upadhyay: Okay.

Shiv Sehgal: The first is deglobalization. We lived last 20-25 years because of the China theme, it was a global world, right? Given what has transpired post COVID, everyone wants to secure their supply chains. I think this whole deglobalization theme is going to play into India's hands. Manufacturing, friendshoring is going to overtake then offshoring.

Surabhi Upadhyay: In a way a lot of the supply chains want..

Shiv Sehgal: Absolutely the reason why Apple is coming to India, for example. Right. That's one, the second is deregulation. The western world is going through a heavily regulated environment, right. Whereas in India, the reform push that is happening, the tax cuts that we are seeing, is providing a lot of growth momentum in terms of confidence to investors. Right. So that's the regulation. The third is debt. We've talked a lot about that. But all I'll add is that

Surabhi Upadhyay: A lot of debt in the US.

Shiv Sehgal: A lot of debt in the Western world. But in India, India is the only place where debt to market cap GDP has monitored in the last 10 years, corporate balance sheets are a lot unlevered today than they were 10 years back, right. Forth is, the demographic dividend. Right.

Surabhi Upadhyay: India has a young population.

Shiv Sehgal: Absolutely. We are going to provide 20% of the world labour workforce, right. And we keep talking about that on every public forum. Everyone knows the answers to that, you know why that is relevant. And it's, it's an ageing, aspirational, middle income group that's going to drive consumption and the last, to me, we are the largest democracy in the world. Right. And it is one element that is missing in terms of Russia and China.

Surabhi Upadhyay: Absolutely.

Shiv Sehgal: So those for me are the 5 Ds

Surabhi Upadhyay: 5Ds. That’s deglobalization. Then there is debt, which we have less here.

Shiv Sehgal: There's deregulation

Surabhi Upadhyay: Deregulation, democracy and the demographic dividend

Shiv Sehgal: Absolutely.

Surabhi Upadhyay: I know the 5Ds, which are making India stand tall, I guess, in the global financial landscape. You know, on the deglobalization bit, I want to ask you, because I know you travel a fair bit around the region as well. There is this whole talk of China, you know, when we started the year, it was the sell-India buy-China trade, and then somewhere in between was like, Okay, now now China is recovering. So maybe go back and buy China, and maybe unload a bit from India. Where does that trade now? Who's selling what and buying what, between these two giants?

Shiv Sehgal: I think we have to understand that, you know, China was a big team over the last 20-25 years. Yeah, right. It was a large part of the EM basket. It was a large part of the global growth elements as well. That's flipped over. Right. And that is playing into India's hands because we were not a large partner when China was growing right, when it de-grows, the pockets that will be hit will be Korea, Taiwan, Indonesia, Australia,

Surabhi Upadhyay: Because they are all sort of piggybacking on that China growth story

Shiv Sehgal: Absolutely. They were large partners. What I do feel is that that is playing into India's hands when I speak when I have in my travels when we especially the large asset allocators in the world, right? The investor confidence in China is broken. Right?

Surabhi Upadhyay: It's broken?

Shiv Sehgal: Absolutely broken. Yeah. I think there are not only from public markets, but even from private equity perspective, there are not many deals happening, right. I think the amount of money, incremental money that will go into China, at least in the near term until some big policy developments, take a I would say, you know, a flip I don't see money moving back into China in the near term. To the extent it should given the large size of the economy.

Surabhi Upadhyay: So then that money you're saying may find its way into it.

Shiv Sehgal: It's not may it is happening in India

Surabhi Upadhyay: Okay.

Shiv Sehgal: If you look at the data for this year as well, probably, not probably, 50% of the EM flow that has happened in Southeast Asia, has happened in India. We all know this, 14.1% of MSCIM is now India. Yeah, right? I think that number only continues to expand. And you know, just recently we had this whole news of JP Morgan, you know, making Indian bonds, investable and adding them to the index, that's gonna see $25-30 billion of inflow. Right, I think the western world is waking up to the fact that India, representation in global asset allocators is under-appreciated, right. And I still see pockets of money, not little, but lots, especially in the Western world, where people have been talking about India, everybody has been waiting for a pullback to India, right, which we know is not happening. Right. And my point is, as this whole confluence of sweet spots continue to improve, right, that foreign money will be on top of the underlying layer of $35 billion of domestic inflow that we are already seeing, I feel Surabhi and I'm happy to go on record saying that that between 25 and 27, India will see a super equity bubble cycle.

Surabhi Upadhyay: Okay, between 2025 and 2027?

Shiv Sehgal: I think, the grassroots have already been laid

Surabhi Upadhyay: A super equity cycle, almost a bubble?

Shiv Sehgal: Absolutely, I think that you will see the maximum gains, and there are enough anecdotal historical studies done on the members, where when an economy goes from 3.5 to 6-7 trillion, right, which is what we are going to do in the next four or five years. Right, we are going to see the maximum gains, benefits made in the equities.

Surabhi Upadhyay: I straightaway have to come to now the brass tacks questions, how do you prepare for it? What do you look at? What should portfolios look like? And what should investors do to prepare for this huge boom cycle? If it's coming?

Shiv Sehgal: So my first answer is that India remains a buying market. Right? If you see any opportunities, right, it's going to be volatile, right? Nothing is one way right? It is going to be volatile, right? You need to make sure that now since we talked so much macro that your micro is right, you are sticking to the right management, right, cashflow generating businesses that are not dependent on high debt. Right. And there are umpteen number of companies and businesses and sectors that I'm super bullish on and I'm happy to lay it out there. Even at Nuvama, we feel the theme is gonna play out. Given the domestic consumption play in India, right, we are very oriented towards domestic themes that we play out. Right. One is like domestic autos, for example. Domestic autos, you know, have been in a benign environment sale have started picking up, we remain very, and I'm talking about autos and auto ancillary is both. Cements, you know, India government has announced that they're going to make 1.4 trillion of CapEx in the next five years, right? The spending on CapEx in infrastructure.

Surabhi Upadhyay: Infrastructure, real estate, you need cement for everything.

Shiv Sehgal: India is in a transformation age, which we don't understand. You know, China went through that between 1995 to 2010. India is in a similar phase, right, where there is CapEx gonna happen. I remain very bullish despite my negative view on interest rates. Okay. I remain very bullish on Indian real estate. I think, you know, also I look at cycles, we have had 10 years where, you know, we are just entering that cycle.

Surabhi Upadhyay: The upcycle.?

Shiv Sehgal: The upcycle. Right. So, I think real estate, you will be amazed. Well, you know, if you look at the monthly data of the registrations that are happening in Mumbai, and Delhi, NCR and Bangalore. Right, they're all on an uptick. Right. So any domestic related themes? I'm extremely bullish. Okay. Right.

Surabhi Upadhyay: Real Estate, cement, construction, and domestic consumption

Shiv Sehgal: And infrastructure. I think, you know, you saw what happened with the railway stocks recently, right? Yes, absolutely. Right. So, I think you will find pockets and themes, where in the next few quarters and years ahead, right? Yes, you want to take some profits and things go, you know, the mid-caps had a great rally. You want to take some profits on the table, as in when things go, you'd get euphoric. But again, I'm happy to say that I think the euphoria, I don't think I even I can envisage the euphoria that we will see because you know, when we started on the path of outperformance, right, we could have said it is a bubble in 2012, 2013 and 2015 Right? Till 2021, the outperformance of the NASDAQ continues to happen, you know and I think that's the biggest challenge that a lot of investors also face because you always have this debate about valuations and whether this has become too much. This is excessive, or whether this time is different. And these are the catchphrases in the market. I think we're trading at what just about 20 times there abouts 2024 is the is the is the range that we will continue to trade in my view.

Surabhi Upadhyay: You're saying 20 to 24 times on nifty, nifty forward earnings. So, we shouldn't get worried with valuations, we should be, you know, ready to prepare for higher levels, higher stock prices and higher index levels.

Shiv Sehgal: Your margin of safety is gonna come from valuation, no doubt, but the the reality is I've read and studied and played part in some of these bubbles. Yeah, right, given, you know, the white hair that I have. The reality is that I want to say that if you overlay the liquidity cycle, that the money flow that is going happening from a domestic scene, the foreign money that is about to come into India and is continuing to come in. Yeah, if I juxtapose that I superimpose that with the business cycle that we find ourselves, I think we are in a superpower situation, right? So again, I'll overlay that for the next three to four years, right? Any pullback, in my mind, needs to be bought into, right because you will see outsize gains and outside performance. Because it's not only an absolute game, but also a relative game. So, the world is starved for growth. Yeah, right. Yeah. Right. Again, you know, the world is starved for growth and that growth is happening in this monsoon way. It's not only happening in India, the Middle East, India, Southeast Asia, right from Singapore, to Dubai, to maybe Saudi Arabia, right. That's my belt, where I think the next wealth creation will happen and the West will deteriorate.

Surabhi Upadhyay: Okay, so I like the long macro calls coming through. Okay, so I think Shiv, you've given us a lot of food for thought. Let me ask you. I think the one most important tip that you gave us was buy every dip as you're preparing for the super cycle. Anything else, anything else that you want to advise people to keep in mind?

Shiv Sehgal: Do you, do your own due diligence, do your homework I see too many people approaching me and approaching people in the market, you know, give me a tip but no tip will work out, if you don't have your own conviction, and if you're not on your own homework, and you know, you need to be inquisitive and you need to have a broader framework. And if within the framework you have done your micro research, stick to it with conviction. I’m sure you will you know it's going to be a well creating opportunity.

Surabhi Upadhyay: Super talking to you. I feel very charged up extremely bullish and extremely optimistic looking at the future. So thank you for this great conversation.

Shiv Sehgal: Thanks. I enjoyed it very much.