Indian markets are outperforming. We are looking at a market like never before. While no one is complaining, at least no one who is long in the market is complaining about this outperformance. My question is: do you think this outperformance is real and is it here to stay?
This outperformance is a function of several factors. One is obviously that the Indian market itself has performed well. It is because of the pure construction of the market. During the severe second wave of Covid in April, May and June, global cyclicals that are names of technology or commodities held the market down. While we have seen the Covid recede, vaccinations have resumed.

We’ve seen some of these national cyclicals, consumer discretionary brands and now banks take over. It is because of the pure construction of the market. We don’t see the index pain when domestic cyclics go through this and that explains the good performance of the market as a whole.

The outperformance factor comes from China’s underperformance. We’ve seen China underperform hugely over the last three months in particular and that has happened because of Evergrande’s flaws, some of the issues with the internet companies they wanted to regulate and control, and so on. This is why compared to the EM benchmark or compared to China, there would be an outperformance of 30 to 35%.

We saw this kind of outperformance in 2014 when Prime Minister Modi was elected for the first term and it changed the Indian narrative. Another example was in 2007 when we used the word decoupling. Is India reassessed because of some of the factors you mentioned?
In the past seven or eight years, when most countries suffered from underinvestment, China has been overinvested. There was a lot of promise when Modi became Prime Minister in 2014, but the following years saw some cleansing as most banks struggled with high NPAs. . Then came demonetization and then the GST. As a result, the economy never really picked up and what we are seeing now is pent-up demand and it looks like it’s all falling into place. We have a strong demand for IT services; the wage increases are quite high and that creates its own virtuous circle.

We have also seen the PLI program do wonders for the country. Last year, despite such a severe Covid, which impacted travel within the country and literally kept the country closed for almost two or three months, India received nearly $ 60 billion to $ 65 billion. of FDI flows. So a lot of good stuff is happening in the background. When it plays out in stock prices, it’s almost all at once and this is where the gains seem a little higher or exacerbated.

But we’ve always kind of told our investors to play the business cycle. At the start of the business cycle, valuations might seem expensive, but as operating leverage plays out, this whole business of corporate earnings to GDP that is currently 2.5-3% could drop to 4. 5 to 5%. No one expects them to return to the 7% peak, but as it plays out, money can be made in the market. Along the way, we will have bumps. Stagflation becomes a short-term concern as commodity prices rise.

No one can predict what will happen next, but we can certainly prepare for a drop or increased volatility. What are you doing? Are you reducing your exposure in certain areas? Do you buy puts? How do you prepare your portfolio to protect returns and take advantage of volatility?
Let’s take a look at the parts of the market that are priced close to perfect and that can be negatively affected by rising commodity prices. Discretionary consumption would be a sector, in particular the sustainable space where stocks have performed very well and would be impacted by the pressure on gross margins, etc.

Aggregate demand can be a little subdued if we see crude oil prices hit $ 90, $ 95. Of greater concern for the country is the number of trade deficits, which for September was unusually high. If this continues for the next three to six months, the currency could be under pressure. The way there is to buy puts. But then again, we’re telling our investors that we want to take a medium-term view. If we have a time horizon of three, five years, these debts that will arise over the next three to four months due to high commodity prices, will increase the exposure.

In our segment, we look at the mid-term story. This has been the best in the last 10 years and why I say this because we have a government that is very progressive and business oriented and is doing whatever it takes to jumpstart the investment cycle. There is a huge pent-up demand. We have no misallocation from the previous cycle. The last business cycle we had was between 2009 and 2012, which was itself a mini-cycle. There are therefore eight years of pent-up demand which will translate into demand for real estate, automobiles, durable goods, etc.

I wouldn’t be too bearish about it, but along the way you will have these bumps because people around the world are worried about a stagflation hit, which could happen in the markets within three or six. months, as demand slows down and supply bottlenecks cause higher prices,