What do you make of this entire narrative, which is now favouring China over India? How real is that and do you think that will have implications at least for next 6 to 12 months?
Sandeep Tandon: So, if I look at China versus India, let us talk about scenario if I look at for let us say, a few decadal perspective, I think it is India decade. But even if I look at from longer term perspective, I think people have burned their hands badly in China, I think long term money will not shift. Now question comes from the near term and the medium term perspective. Yes, the market has beaten down significantly, the first time they have showcased that they care actually about the market. So, money has shifted and money can shift even in the near term perspective.
Whether it can be a long lasting phenomena, I do not think. I think it should ideally peak out in a quarter’s time on higher side, maybe this month itself, because it rallied sharply.
So, by the time you get into it and you get out of the market, it is very difficult to make money after, let us say, ETF which has moved up 20%, some of the indices moved up 20-30%, stocks have moved up even higher.
I think it will be a challenging phase. If somebody says that I will shift money now and make money in China, smart money has already shifted. But psychological, I have seen that it will be a pressure for India and whenever we have seen when China performs, global market do not perform. It is not only about India, when China outperforms, they are largely in isolation. Now, there is no hard and fast rule, but it is just observation. I do expect some more money will shift and that is the reason one has to be very selective.
When you say you expect things to remain volatile, what is the definition of volatility, the existing leaders will go up and down or new set of leaders would come, every time they are accustomed to hearing the word volatility, market rushes back into FMCG and defensives. What will play out in this leg of volatility?
Sandeep Tandon: So, when we look at volatility, do not look at in isolation, do not look at just the Vol indices. In fact, Vol indices globally have not moved up, they have moved just for a few days and come down. But if I look at the choppiness, which I am referring to, whether you talk about, let us say currency market, let us come back to the currency market because in the month of August when we saw yen started appreciating sharply, that was a reversal point for the carry trade. Now, if you really look at today, USDJPY, it has again started rallying from 140 levels to 147 today.
I expect that it has potential to move up even further, which means the carry trades are coming back in the market, which also endorses that liquidity will further increase, so that is a very constructive background, irrespective of whatever noise we have seen on the geopolitical front, but the global liquidity remains very elevated and that is the reason why global market, global equities are not falling, including India also, we have not corrected any meaningful manner, despite the noise level which was very high, so one aspect from the currency perspective. The vulnerability aspect is the dollar index.
I have been saying that closer to if not breaking 100 levels also, so perceive risk if something is there in the market is in the dollar, if the DXY started strengthening further, this entire narrative which was based on the metals has played out very well, very recently on the China, that can be affected or it can be dented at least, so that is the worrisome which we have on the emerging market currency.
Now, it has not showcased any decisive strength. But if somebody asked me what is the current perceived risk in the market, I think it is a DXY rather than anything else.
You do not put your eggs in the same basket A) and you do not put them all in one go. I mean, history has taught us and very recently after the election results and other events as well that our markets also will correct and the fall could be as steep as even 2-2.5% on a single day, but that gets very swiftly bought into as well. The question is, what is it that you buy right now looking at the market and how well discovered it is already?
Sandeep Tandon: So, our thesis in this volatile phase has been to buy safety, some sort of defensive name. So, we have skewed our portfolio towards the consumption name, particularly the FMCG, some amount of pharma, some amount of insurance, some amount of the hospitality or healthcare, the hotels, hospitals, tourism, these are the names which we think is safety is much more and obviously given the background what we are in right now, we have been very vocal that I like to see my portfolio to be more liquid rather than having a large exposure in the illiquid name and that is the biggest risk which I see in most of the portfolio.
The portfolios have rallied a lot, but they will not get any exit in these names because when market corrects, illiquid stocks do not have any exit and whatever the changes that the SEBI has proposed in the F&O side, it clearly indicate the activity in the F&O side will come down significantly and it will increase the impact costs in the market.
So, as institutional participants, we are worried about the rising impact costs and that is the reason I like to play liquid names in the current level, irrespective of even a marginal fear of underperformance, that is a better strategy rather than getting in the illiquid names and then you get stuck.
That is quite interesting that you say that because right now while of course, I understand your distinction between illiquid and liquid names, where you are seeing a chunk of the move is very selective again, fewer technology names, auto names from amidst the benchmarks and of course, banks on the other hand and largely very niche smallcap spaces which are seeing the bout of the volumes.
Sandeep Tandon: That is correct because if you really look at the cycles are getting so compressed, like when we talk about correction can last for a few weeks, it hardly lasts for a few days and sometime in intraday also it reverses.
So, cycles are getting compressed. And since I talked about the impact cause on higher side, both buying and selling perspective, the dent is very meaningful, if you want to exit something, the impact is very large and we want to accumulate, so if the move is so fast and so swift, it does not allow you to actually take any action and that is a reason why most of the actually portfolios are underperforming despite the index level closer to a lifetime high or recently make lifetime high or close to lifetime high.
So, what could be the trigger point when you would say that it is time to perhaps go all in, which is that you are sitting on cash, you move towards defensives, when would you start buying risk or growth or perhaps beta in your portfolio?
Sandeep Tandon: So, as you know we are slave of data, we say objective is the religion and data is God. None of the data points are endorsing that we should go very aggressively all in. We have been saying it is a mild risk off period and we are playing.
As of now, none of the data points have really changed. I actually expected by end of September it should settle down with the global volatility, but I think that cycle is getting extended. So, maybe closer to the end of this month or maybe post US election, I would like to see how situation changes.
So, I will like to be very watchful. Again, since we are data driven house or analytic firm, we do not say this is my opinion, it can change tomorrow based on some of the data points which we look at. But as of now, I will play safe.
But opportunity like today, whatever space you are bullish, I think one should participate. So, neither I am very negative on the market, nor I am complacent. I am yes, mild, cautious, and playing it from a longer-term perspective now.
And in light of this then, what would be the approach or the outlook when it comes to the kind of FII flows because that has been picking up, but given the China stimulus factor, where do we stand as compared to some of the other emerging markets?
Sandeep Tandon: So, the most important aspect, I think we have to watch since I talked about dollar index, I think how it impacts so far currency USD, INR as a pair has been reasonably stable. But for if any reason, if DXY spikes, how it impacts the emerging market currency I think that is something I like to watch very closely. Second important aspect is that like lot of people are talking about now money will shift to China.
Yes, the easy money or if I have look at the hedges’ money, which is called it, they have already started, they are very swift. So, they have already moved out to a large extent. But to say that all traditional long accounts will migrate to China immediately, does not look like it.
If it sustained for a longer-term perspective, there may be people who will like to review their position maybe end of the year or so, I do not think this 20-30% moves which are happening in the market will change their mindset from China which has been underperformer and people fundamentally have taken a negative call on that.
With that background, the impact on India also will be a short-term phenomena, it is not a long-term phenomena. So, maybe a month, maybe a quarter. I am more in the camp that maybe in month itself this should settle down and if DXY changes, this entire thesis of China will be on the back burner.