Talking Point | Key Headwinds & Tailwinds For Stock Markets In 2024 | Talking Point With Niraj Shah

Summary

In this episode of Talking Point, host Nid Sha discusses the macroeconomic factors affecting the market, including interest rates and geopolitical issues, with Shiv Puri, founder of TVF Capital Advisers. They explore the potential of the Indian market, focusing on FMCG, IT services, and energy sectors. Puri shares insights on long-term investment strategies, the impact of reforms, and the importance of growth sustainability. The conversation also touches on the consumer market, premiumization trends, and the valuation debate in Indian equities.

Takeaways

• 📉 The direction of interest rates is considered the biggest sway for the economy between now and the end of the year, with inflation spikes historically taking a long time to settle.
• 🌐 Geopolitics and elections are not expected to have significant surprises, with the market accounting for these factors and expecting political continuity.
• 🔄 Despite short-term fluctuations, the long-term structural story of India's economy remains positive, with reforms like GST and bankruptcy laws now well understood and beneficial.
• 📈 The Indian Equity market is broad-based, with growth widespread across sectors, unlike the US market which is largely driven by big tech stocks.
• 🏦 The financial sector, particularly private banks and NBFCs, is seen as attractively valued and poised for growth, despite recent underperformance.
• 🛍️ The consumer market is bifurcated into aspirational and regular consumption, with the latter facing challenges due to inflationary impacts and slow real income growth.
• 💎 Premiumization and urban upper crust consumption are multi-decadal opportunities, with sectors like jewelry, retail, and discretionary services showing strong growth.
• 📱 The technology sector and digitalization of the Indian economy are compounding benefits and are structurally interesting for the long term.
• 🚄 Infrastructure and capital goods sectors are expected to benefit from a structural demand cycle, especially in areas like Railways and green energy.
• 📲 The telecom sector is becoming more concentrated, with the top two players dominating, making it difficult for a fourth player to establish a significant market share.

Q & A

What is the main factor that could impact the macroeconomic environment according to Shiv Puri?

The main factor that could impact the macroeconomic environment, according to Shiv Puri, is the direction of interest rates. Historically, when inflation spikes, it takes a long time to settle, and the direction of interest rates will have a crucial impact on the US economy and the Reserve Bank's rate cutting strategy.

What is Shiv Puri's view on the impact of geopolitics and elections on the market?

Shiv Puri believes that geopolitics issues have been around for a while and the market has already accounted for them. Regarding elections, he suggests that most investors in India are assuming no surprises in the outcome, and any disappointment would be short-lived as long as there is a majority, indicating structural stability.

How does Shiv Puri perceive the long-term structural story of India?

Shiv Puri perceives the long-term structural story of India as remaining unchanged and clear, having gone through springs but with a consistent direction. He highlights the compounded benefits of reforms like GST, bankruptcy Bill, and real estate regulatory reforms, which are now well understood and integrated into the economy, leading to compounded benefits in the years ahead.

What areas does Shiv Puri find interesting in the Indian market?

Shiv Puri finds areas like banking, healthcare (especially hospitals), and certain pockets of consumption (not just FMCG) to be structurally interesting in the Indian market.

What is the difference between the Indian and US Equity markets according to the discussion with Shiv Puri?

The Indian Equity market is more broad-based compared to the US Equity market, where returns have largely been driven by big tech stocks. In India, growth has been widespread across sectors, which is considered healthy.

What is Shiv Puri's opinion on the high valuations of some high-quality names in the market?

Shiv Puri advises caution when considering high valuations, noting that some high-quality names have changed their business models to be more service-oriented, which is reflected in their return on equity and capital ratios. He suggests looking at the durability of growth, barriers to entry, and return on capital metrics rather than just PE ratios.

How does Shiv Puri view the potential of economy-facing sectors like Railways and green energy?

Shiv Puri sees a very structural demand cycle for certain segments in infrastructure and capital goods like Railways. However, for sectors like green energy, while they are beneficial for the overall economy, they may not necessarily make great businesses by themselves.

What is the current stance of Shiv Puri on the Indian consumption space?

Shiv Puri sees a two-step consumer economy in India with aspirational consumer growth on one hand and regular consumption facing challenges due to inflationary impacts on the other. He suggests that real incomes need to increase before consumption at that level can move higher.

What is Shiv Puri's view on the valuation of the Indian markets?

Shiv Puri believes that the duration of growth matters and that Indian markets have shown a long duration of growth, which justifies higher multiples. He suggests that while some mid and small caps may be irrationally high, well-run larger cap companies are still within their historical valuation ranges.

What is the current largest overweight theme for Shiv Puri in the Indian landscape?

At the time of the discussion, Shiv Puri's largest overweight theme in the Indian landscape is financials, specifically private sector financials and NBFCs, as they have become attractively priced despite reasonable growth numbers and potential improvements in asset quality.