Are markets secretly pricing in tapering whenever it starts?
Tapering was uppermost in the minds of people just a few weeks ago, and now it is fading into the background because there is a realisation that perhaps the Fed will take cognisance of this new variant of Covid and maybe will not tighten the screws as much as we expect.
If the Covid variant spreads, what happens then? How do you think markets would adjust?
Last year when this Covid situation hit, there was panic. The market came down dramatically but recovered very quickly. People have been hearing about Covid, a big disaster, big problems, and now they are beginning to say that the last time it was not so bad, the market did well. So why should I panic about this situation?
Yes, the new variant is highly contagious, but it is not necessarily fatal. In other words, the deaths so far are minimal. So you may find a situation where people will realise that this new variant is not as serious, but people will tend to not react as strongly as they did in the first panic.
Your India exposure was limited to three stocks. Have you made it four or five?
No, we are sticking with those stocks, and we are very happy with them. We continue to look at possibilities, but so far, we are not making any changes.
Any reason you opted for a Persistent and not a frontline name like TCS or Infosys?
Yes, the whole idea about the fund was to be different from the indices. The ETFs are instruments that many-many investors are using because they’re based on indices. So for us to offer anything different from what people now have is to do something where the index is not involved. We make a point of not investing in companies in the index.
In our portfolio of three stocks, maybe two are in an index and not the main index. So that is one of the overriding principles that we have in our portfolio. The second thing is that we want to go after medium and small-size companies, which people have not noticed.
People are not into the idea that these companies will grow. They will gradually recognise the value of the companies, of course, then prices will go up.
PolyCab and Apollo, two stocks you own, in a sense, are commodity consumers. At a time when we are seeing a re-rating in the commodity complex and companies are struggling with maintaining cost, does it make sense to bet on commodities, consumers and not producers?
Not necessarily. If you look at the two manufactures, yes, they are using steel and steel prices are up, but it is only one part of their overall cost.
The other part is labour and other aspects of manufacturing. So the impact on pricing is not that great.
The good news, in addition to that, is that with the power of quality they can get a premium price. They can raise prices without having too much of an impact on demand. It depends on the individual company.
You will find that many commodity consumers continue to do well simply because the demand for their products is so intense and their quality is good that they can maintain the market whilst raising prices.
Is there any reason for you to get worried about your India exposure?
We only worry about one thing – the companies in which we invest. What is the situation with the company? What is the macro environment impacting them? We are not focussing on the index or what ICICI or Reliance are doing. We are focused on companies in which we invest, and we find that the price behaviour differs from these companies and others.
Are you surprised with the kind of IPO euphoria we have seen in some of the new tech companies? Have you looked at names like Zomato or Paytm, or have you given them a complete skip?
We will skip for two reasons. We don’t go into IPOs too often as they are perfectly priced. Their prices are not necessarily a bargain. Second, many of these IPOs, particularly in tech, are built on hope and poor cash while the companies are still losing money. We do have a policy of not investing in companies that are losing money. Now, yes, prices could not go through the roof when people are excited about technological innovation or excited about the company and their hopes and fears, but at the end of the day, we find that it is better to stick to companies that have a solid foundation, low debt and good earnings.
Many global investors who invest in India buy private banks or buy into financials. Why have you given that a skip?
Financials, often, are in the index, so we are avoiding them. It is often difficult to find what is happening with the banks. So if you go into a bank to interview the management and ask about the number of bad loans they have, they won’t tell you what is happening. They do not want to look bad.
Say non-performing loans are 2% or 3%, but in reality, they probably are more like 20%, so this kind of opacity makes it very difficult to invest in banks. You have to be extremely careful. Those are the two reasons why we cannot favour banks. It does not mean we are not going to ever go into a bank, maybe a small bank that is growing rapidly for one reason or another and is solid and where we can get the information we want, but otherwise, you have to be very cautious.
Would you buy Bitcoin? So if you have to look at a buy, sell and hold for various asset classes, how would you classify them?
People should have some gold, maybe 10% of the assets for emergencies. Gold, a currency throughout the history of mankind, and it is something that you can have. Bitcoin or cryptocurrencies are in the class of religion, it is a belief they will go up if other people believe the way you do, but otherwise, it is not an investment. It is not something that earns money, that pays dividends, produces something. It is not only a currency but can be used for industrial purposes.
I was talking to a semiconductor manufacturer, and I said, have you ever used gold? He said yes, we love gold for connecting semiconductors, but the problem is its price. It is a little bit too high. If it comes down, we will switch from copper to gold because gold is far superior to copper. That is why I do not think cryptocurrencies are in the category of viable investments. It is speculation you could play with it, have fun with it but do not consider it as an investment.
Do you think there is a bubble in the making in the entire electric vehicle space?
In some cases, there is a bubble. Every buyer is rushing into that space. New electric car companies are being listed or formulated.
It is like the gold rush in California. Many many years ago, the people that made money were the people selling shovels and tools for the miners, and that is probably two of the EV area people that are making components of batteries or certain gear shafts that sort of thing will probably make money, but a lot of the car companies will not do very well.
What is that one data point you would monitor which will convince you that it is time to sell or exit your India portfolio?
The most important thing, of course, would be government regulations. For example, the Indian government says, we are now going to impose a big tax on foreign investors, or we are going to limit the ability of foreign investors to limit their earnings. Things like that would throw us into a panic and be a great concern to us.
That would be the number one problem. Others like the problems with earnings, company characteristics. So far, we can handle that. We can work with the companies or sell according to what we think they are going to be doing. Generally speaking, we tend not to turn over our portfolio very much. We are very, very low turnover because we have companies that we believe in and know will do well over the long term.
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