Equity, Economy & Credit: What To Bet On? | Maneesh Dangi On NDTV Profit

Summary

In this episode of Profit Insights, Manish Dangri of Mosaic Investing discusses the cyclical nature of asset classes and the importance of investing based on economic cycles. He explains that equities are best suited for early cycles, credit for mid-cycles, and bonds for late cycles. Dangri suggests that the current economic state places us in a mid-to-late cycle, making credit a favorable investment. He emphasizes the strength of corporate balance sheets in India, advocating for investing in corporate bonds over equities due to their clean balance sheets and potential for higher returns in the current market environment.

Takeaways

• 🔄 Asset classes move in cycles, influenced by economic booms, stagnations, and busts.
• 💹 Early economic cycles favor equities, mid-cycles favor credit, and late cycles favor bonds.
• 🌐 Global economies, especially outside of China, are heavily influenced by the US economy.
• 🇮🇳 India's current economic state is between mid and late cycle, with potential for rate cuts if the US Federal Reserve does so.
• 📈 Manish Dangri suggests that credit is currently the juiciest part of the market for investment, given the strong balance sheets of Indian companies.
• 💼 Credit investment is about betting on the balance sheets of firms, which are currently in a strong position in India.
• 📉 In a potential deflationary scenario, as influenced by China's economic trends, equities might face challenges while bonds and credits could fare better.
• 🏦 Regulatory arbitrage and access to certain trades can provide opportunities for credit funds to deliver equity-like returns.
• 📊 The risk-adjusted returns for equities are currently lower in the mid to late cycle, making credit a more attractive option.
• ⏳ Manish anticipates a 5-7 year window where credit investments could outperform, considering the current state of corporate balance sheets.

Q & A

What is the main theme of the discussion in the 'Profit Insights' interview?

The main theme of the discussion is the cyclical nature of asset classes and how different asset classes perform in various stages of the economic cycle. The conversation focuses on equities, credit, and bonds, and how an investor should allocate their investments based on the current economic cycle.

Why does Manish Dangri believe in thinking about different asset classes at different points in time?

Manish Dangri believes in thinking about different asset classes at different points in time because everything, including markets and economies, moves in cycles. These cycles consist of booms, stagnations, and busts, and understanding where in the cycle an asset class is can help in making informed investment decisions.

What does Manish mean when he refers to 'early cycle', 'mid-cycle', and 'late cycle'?

Manish refers to 'early cycle' as a stage where the economy is accelerating, making it a good time to invest in equities. 'Mid-cycle' is when credit becomes a better investment option because balance sheets are clean, and even if profits slow, credit is not significantly affected. 'Late cycle' is when it makes sense to invest in bonds, as there is a high likelihood of rate cuts due to economic slowdown concerns, which benefits bonds.

Where does Manish believe the current economic cycle stands, and why?

Manish believes that the current economic cycle is not in the early stage and is somewhere between mid-cycle and late-cycle. He bases this on the observation that economies, including India's, have experienced significant growth post-COVID but are not currently showing signs of further acceleration in growth metrics like car sales, GDP growth, or import growth.

What is the potential impact of the US Federal Reserve's rate decisions on other economies like India?

The US, being a significant global economy, has a substantial impact on others. If the US is in a late cycle and the Federal Reserve embarks on a series of rate hikes, it could lead to a slowdown in other economies, including India. However, if the Fed cuts rates, India might also consider rate cuts, as the Reserve Bank of India (RBI) often looks at global enabling conditions along with local economic factors.

How does Manish differentiate between investing in credit and bonds?

Manish differentiates between credit and bonds by explaining that credit is a bet on the balance sheet strength of a firm, focusing on the ability of the firm to absorb shocks and repay debt. Bonds, on the other hand, are a bet on inflation. He suggests that in the current economic climate, with clean balance sheets, credit could offer similar risk-adjusted returns to equities but with less volatility.

What does Manish suggest about the current attractiveness of credit as an asset class?

Manish suggests that credit is currently an attractive asset class due to the strong balance sheets of corporations. He argues that even in a mid to late cycle, the risk-adjusted returns from credit could be comparable to equities, but with less volatility, making it a good investment option for the next 3 to 5 years.

Why does Manish think that the risk premium for equities might be low in the short term?

Manish thinks the risk premium for equities might be low in the short term because the economic cycle is not in the early stages, and we might be entering a mid or late cycle where earning growth could slow down. Additionally, equities are more expensive, and the volatility associated with them might not justify the higher risk for a short-term investor.

What is Manish's view on the potential for deflation versus inflation affecting economies?

Manish expresses concern about the potential for deflation rather than inflation. He points to China's overcapacity and slowing economy as a significant source of deflationary pressure. He suggests that deflation is a bigger risk for equities, as it can lead to lower profits and reduced growth expectations.

What advice does Manish give regarding investment in the current economic context?

In the current economic context, Manish advises investors to consider credit over equities due to the strong balance sheets of corporations and the potential for lower equity risk premiums. He also suggests that investors should be cautious about the potential for deflation, especially in sectors where China has excess capacity, and be mindful of the cyclical nature of investments.