Veteran investor Ramesh Damani gets in conversation with one of India’s top fund managers Navneet Munot of SBI Mutual Funds on Wizards Of Dalal Street. The duo discuss investing in the time of the coronavirus pandemic. Damani quizzes Munot on his investment mantra, how to create a 'pandemic-proof' portfolio and much more.
Excerpts:
Damani: Nifty at 9,200 - what is that price telling you?
Munot: That was in the context that you should be tracking every market, every price… Economics originally was all about the demand and supply and prices, that one single number which tells you a lot of dynamics, a lot of dimensions. Price is like a collective wisdom of crowd till the time it becomes the many of the mob. At 9,300, we are up like 20 percent from the bottom maybe, that is faith in humans in genuinity - that there is going to be some solution to this crisis. Maybe it is a result of a lot of liquidity which has been unleashed by global central banks and of course the fiscal stimulus. Third, maybe at those levels, valuations became quite attractive which resulted in some bit of buying coming in.
The other way to look at 9,200-9,300, wherever we are, we are down like 20-25 percent from the peak because still there is a lot of uncertainty as far as the trajectory of this crisis is concerned, the near term impact on the economy, the long term implications of this crisis, so on and so forth. From a global perspective, I would say for anyone to turn bullish on emerging markets like India, one would be watching maybe peaking of US dollars, maybe bottoming off US Treasury yields and some bit of a stabilisation in oil and other commodity prices that will be good for emerging markets including India.
For India particularly I think we have all been waiting and watching how a fiscal stimulus comes around.
Damani: There is a debate going on across many countries - lives or livelihood? Now six weeks into a lockdown, what is more important protecting?
Munot: In the initial phase everybody thought that social distancing is the only way out. It also gave us a period to understand how we deal with this crisis. But my view is that the public discourse will start shifting from survival only to revival, which means that we have to look beyond cure because a vaccine will take some time. ‘I have some breakthrough on the medication or maybe even a test kit or something’ – antibody tests in particular will take some time. I think gradually we will have to start learning to live with it and god forbid if there is a second wave, there is a third wave maybe after two years… we have to learn to live with it.
I give you an analogy - let us say road travel or air travel. How we have put the infrastructure and the way we travel to ensure that risk is minimised - I think the public discourse will start moving towards it. From an economy’s perspective, the stringency in terms of lockdown, etc, will contain the health damage. But at the same time, it will have a severe damage on the economic side and it is a difficult trade-off between these two and I am sure everywhere in the world, governments, policy makers are trying to do that.
In India also I think over a period of time, we will have to start making some of those trade-offs. Interestingly, my view is that a lot of innovations need to happen on something like a protective gear -- more on disinfection, more on maybe sanitisation -- and maybe some breakthroughs may come there so that people can come back to work without endangering too many lives. I think... one thing I will add... the old and vulnerable – if we can think about how we take care of them, then a larger part of the economy can come back to normalcy.
Damani: You have argued many times in recent days that the government should not be using monetary policy anymore but fiscal policy in order to tide over the crisis. Can you explain why not monetary policy and what about fiscal policy? What levers would you like the government to use?
Munot: In India’s case, the first heavy lifting had to be done by the monetary policy, which the RBI is doing though we may need a lot more. I think that was more in the global context. And that was the view even before the coronavirus crisis hit -- that over the last 11 years since the global financial crisis, central banks have been pursuing an extraordinary accommodative monetary policy. I mean they have probably used all kinds of tools which otherwise they wouldn’t have. Before this crisis, again they had to do what they have been doing for the last 11 years -- maybe much more forcefully.
The mantle of growth has to shift to fiscal policy globally. They are the ones who have to invest maybe in infrastructure so that new jobs get created. Just to make a point – the US economy in the last couple of weeks has lost more numbers of jobs than it had created since the global financial crisis. The situation is that severe.
My view is that globally fiscal policy will have to assume a larger role to ensure that growth comes back and growth is more sustainable, it creates more jobs, it reduces inequality by investing in digital infrastructure, health infrastructure, physical infrastructure. And at some point in time in 2020 or 2021, I think that is a new normal we are going to see. They will be supported by monetary policy, but I think the heavy lifting will have to be done by governments world over.
India is slightly different because we had a lot of leeway on the monetary policy side also.
Damani: Because interest rates were higher?
Munot: Because over the last couple of years, we have been keeping real rates positive. I mean we had this monetary policy committee framework. If you remember, till a few months back, I think till June or so, we had liquidity in the negative territory in the banking system. Now I think RBI had a huge amount of leeway to pump liquidity into the system and to cut interest rates. There is a lot more that needs to be done because there is still a lot of disconnect between the macro liquidity and what I call micro liquidity. The transmission is not happening because the money is getting funnelled through the banking system and is getting choked there. So a lot of other tools may have to be tried apart from whatever we have done in terms of moratorium, restructuring, TLTRO etc. But a lot more will have to be done to ensure that money actually reaches where it is needed both by the government as well as RBI.
Damani: Let us talk about the fiscal policy. Do you see tax rates going up in India because of coronavirus because unless you cut tax, how are you going to stimulate the economy?
Munot: I think it is tough because we just cut the corporate tax rate to bring a lot of global corporations to India to support the private investments. The individual income tax has already been raised to levels which we have not seen for a very long time. So, it’s unlikely that we have a leeway to increase taxes. What we have to work on is ensuring that we look at a multiplier effect for the money that we are sending.
These are extraordinary times which need extraordinary or unusual solutions. We have to look at the multiplier effect of our spending and a good part of that borrowing has to be taken by the RBI directly. We have never done that for the last 20-25 years but as I mentioned, unusual times demand an unusual response.
For that, it is critical that the places where money is getting spent has a huge multiplier effect. Maybe capital projects are where you can spend money and generate employment. So a substantial increase in NREGA allocation will help and also boost consumption and productive assets.
We have to think more innovatively. Maybe the government puts all the PSUs in a holding company and then borrows money or raises money against it. Similarly, all the PSU banks put in a holding company and then raise money against it to recapitalize banks. We will have to find every possible solution. Our foreign exchange reserves are very comfortable. Humongous in fact. Why do you build these reserves? For these kinds of times.
Can we buy crude oil from that? Can we create a fund which can put in maybe equity capital in the financial system or in the other corporates NBFCs and in some of the other MSME? I think we should explore all possible options to get that multiplier effect because my fear is that we will have a P&L recession. We can’t allow it to become a balance sheet recession because that takes much longer to repair as the potential growth rate itself comes down.
Damani: You said buy more oil but I am afraid there is no place to store that oil. That might be a problem.
Munot: Why don’t we spend NREGA money and create those wells? It will create an asset while you buy that in the forward market and maybe you take the delivery later. By the time the wells are ready, you create an asset and you create jobs.
Damani: You referred to what John Maynard Keynes fondly called the paradox of thrift, it takes the central government or the central bank to play the lead role and spend rather than save in these troubled times.
Munot: The paradox of thrift or the paradox of deleveraging is that in these times what is the rationale for households and corporates may not be good for the society as a whole. So every household, every business will be thrifty. In that situation, there is only one balance-sheet, which has the capacity and the ability to borrow money, raise resources and spend money. You need to pump in the capital and you need to pump in a lot of confidence to ensure that even the household and corporates won’t be as thrifty as they would be otherwise if you don’t do that. So the third balance-sheet of government will have to take the leverage at this point in time.
People will be worried about currency, about the impact on interest rates, crowding out private investments, what happens to our rating but I am sure rating agencies also understand the new dynamics and the new world we are in. It is important we don’t allow our potential growth rate to go down substantially.
Damani: You talked about the fiscal deficit getting blown because of spending, prior to this crisis there was all talk of privatization of BPCL and Container Corporation of India Ltd (CONCOR). Given how much the world has changed in the last three months, would the government still pursue privatization because countries in the west are nationalizing their assets, what do you think?
Munot: I think a lot of businesses will get nationalized. But in India, still we have a long way to go as far as this strategic divestment is concerned. The intent was right, unfortunately, the new scenario getting unfold after the corona crisis will make it difficult for the government to pursue their strategic divestment. You can still do it but you wouldn’t get the value that some of these assets have.
In that case, maybe we will have to think more creatively. Maybe government puts all of these holdings in a holding company, take the money maybe from RBI today and then put a different kind of governance structure around it and over a period of time the new board takes a decision on which asset to be utilized, in what manner, how do we raise resources in the most efficient manner which is good for the society.
Damani: Do you think there is an extreme divergence in valuations as the favoured stocks keep getting richer while the underperforming stocks (eg PSU Banks) keep getting cheaper. Is there an arbitrage of opportunity for sharp investors here?
Munot: When you look at the dividend value, replacement value or strategic value of some of those assets, one can surely look at that space. If the freedom goes away and the government would be selling in the form of ETFs or the OFS that we have been seeing over the last few years, I am sure tactically there is an opportunity there. There it is more about the faith in the potential of the digital economy of India.
Damani: What you feel we should do in terms of the digital economy?
Munot: The world is looking at the digital transformation in India. This is a country which is going to transform from most data-poor to the most data-rich society over the next few years, whether it is e-health, e-education, e-governance, e-payments, e-commerce, e-entertainment, e-judiciary and so on and so forth.
In terms of per capita data consumption, we are much higher than the US and China. This can be our Silicon Valley. I think if policymakers, businesses, and society all work together, we can really encash this. We missed the bus when the fixed-line and mobile revolution came. I think this opportunity can help us transform as a country in a very big way.
If data is the new oil, then India will be the most powerful country in all the world given the sheer size of the country and the role that we can play in various sectors globally.
Several companies in the world, after this deal (Facebook-Reliance), would be thinking about what is happening in India and what are the opportunities in some of the other places. I think we should definitely capitalise on that because we are a capital-deficient country at this point of time and it can mean a lot of savings.
Damani: Let me just give you a follow-up question on this, while agreeing we are data-rich and data is the new oil, we are intellectually property-poor. We are just going to import the platforms from America but don’t have any intellectual property where the real value lies. No IT company in India bid for the Reliance Facebook account for example, doesn’t that suggest to you that we are short-shifting ourselves and that we need to think about building intellectual platform as opposed to just being a service-led tech business?
Munot: You are absolutely right and for that variety of things - so we have to ensure that we have to create the right ecosystem to create the building up of those trillion dollar empires from scratch in Silicon Valley or in China or in some of the other countries. We need to ensure that right ecosystem, net neutrality, cyber security, ensuring data privacy and within those how do we get talent into India – not that there is a shortage of talent, millions of those people working for those organizations work in India or the talent working in Silicon Valley is also Indian. Can we find a way – we create platforms where that talent will feel enthused to come back here and create those trillion dollar empires from India.
Damani: Would you agree that the world has changed in this eight weeks? If yes then how? Also, what are the investment implications that you are factoring for your portfolio?
Munot: The world is going to change meaningfully. There are decades when nothing happens and then there are days when decades happen- this quote perfectly suits our current situation.
The capitalist in my mind feels that there is going to be a creative destruction, showcasing the best and the worst sides of it. Socialism will also see the same fate. The government become bigger in size and responsibility but will also find it tough to come up with solutions every time, and that's when the third pillar i.e. community will come into the picture. It is not only that individuals, companies or sectors will get impacted, several economies particularly those that are dependent on crude oil will get decimated. As a result, we will see a meaningful change in the world.
Geopolitically, I have a very strong feeling that the cold war between the West and China will accentuate. Coming up with new innovations will become important for the countries, which I call 'The Sputnik moment'. It basically means we will witness globalisation of localisation. Every country will now focus on innovation i.e. producing locally or diversifying the supply chain. This was last seen during the 50s-70s (Sputnik moment) when no one knew abou the innovations shaping our future.
Healthcare will become the center of all public policies. As I spoke of the digital revolution earlier, I feel now it lies ahead of us. In fact, I also have a very strong feeling that a huge investment will be made in the physical infrastructure of this country, starting from next year which will create lots of opportunities for India.
Damani: I am hearing about developments in the physical infrastructure in India for the last 30 years, would please explain that?
Munot: When you travel to the US, you see a well-developed physical, social and digital structure. For a country like India, the opportunity will only arrive with proper structures, which is the railroad system, healthcare, automation, supply chain, jobs or the digital world.
Every company will look at reliability instead of optimisation. I think people are going to diversify and India could be a beneficiary of it. But we will also have to compete with everybody else (countries) and that is what I mentioned about globalisation of localisation.
For instance, if we were to produce something here, we have to ensure that we have all the structures properly put together, which will attract demand and bring back the focus on our demographic potential.
Damani: How hopeful are you there, we will be able to do what you say in a meaningful manner, the government, the regulators, the bureaucracy, the tax department? Are we ready for this challenge?
Munot: This is like once in a lifetime opportunity for the country, society or for the community and everyone has to rise to the occasion. There would be a big global geopolitical change and everybody would be looking at this India’s 1.35 billion people. The bigger supply of labour force to the world in next 10-20-30 years and in a rich digitally society. We have to remain optimist and I hope that we do not miss this once in a lifetime opportunity for a country.
Damani: Let me ask you a few questions about your portfolio. Even today I notice you are heavily overweight private banks, why are you so bullish on that sector?
Munot: The sector provides a huge opportunity in the long term due to the formalisation, digitalisation and financialisation of the economy. The opportunity also lies in an underpenetrated credit market, underpenetrated savings, production, investment products, etc. The banking sector is witnessing consolidation. Banks with adequate capital, good liability franchise, right digital technology, risk management processes and better management are ready to grab market share from big players, particularly in the public sector.
There are near term uncertainties over credit costs due to which the valuations will remain depressed, but longer term opportunity is still very much in place for the top tier quality names.
Damani: Since the crisis began, in which sectors have you moved money in and which sectors have you moved money out of?
Munot: It is less of a large sector bet and more of a bottom-up bet. I look at resilience in each company. Amid the uncertainties going ahead, we have to monitor those companies which will not only survive this crisis, but will come out stronger after that. We identify companies with good management, good business and reasonable valuations and today the valuations are reasonable.
Damani: You do not necessarily favour large and small caps?
Munot: I think our focus is not on large or midcaps, in fact I have a very strong view on this. When you have such disruptions -- and we have lived through what happened in early 90s -- you were happy with a small cap or microcap, example Infosys versus some of the large caps you do not want to take names that were there on Sensex or maybe Nifty. I think in the coming years when you have such disruptions, which we are going to see in policy, in consumer behaviour and logistics and all kinds of major technological disruptions and the fact that markets will change dramatically, I think you are better off with companies that are nimble and agile. I think it is the adaptability which is more important than the size and stability. I would like sustainability; how companies are dealing with all stakeholders is something very critical.
Damani: Let me just wind up with a quick rapid fire round. A CFA degree or a CA degree?
Munot: I think CA makes you better in numbers; CFA makes you a better investor.
Damani: George Soros or Howard Marks?
Munot: That is a tough one. Soros as a philosopher and Marks as an investor. I like Soros as a philosopher.
Damani: But you have to pick one.
Munot: These days because Soros is no longer an investor so I would go with Marks. I like the whole theory about cycles.
Damani: Indian debt or Indian equity over one year?
Munot: Both in the very near term duration will do well, but in the longer run I am sure equities definitely offer good value.
Damani: Pharmaceutical stocks or FMCG stocks over a one-year period?
Munot: Instead of pharmaceutical I will call it healthcare; pharmaceutical is just one segment within healthcare. I think globally healthcare will be the focus of policy.
Damani: Would you tell advisors to be cautious or active during this period?
Munot: You have to be anxiously excited and so you have to be cautious, but that means that you ensure you do not take the wrong decisions in such a volatile market. It is going to be volatile for the next few months, but try to be on the right side of it, take advantage of it, don’t get swayed by it.
First Published: May 8, 2020 11:11 PM IST
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