2023 a massive flow year; huge liquidity to come to India in next 12-18 months: Vikas Khemani

“CY2023 will be a massive flow year. It could be $15 billion, $20 billion or $25 billion – that is anybody’s guess. But I see India is progressing very well, there is no alternative economy or market which can offer the same kind of profile and everybody is underweight India. So I just see a very massive liquidity profile coming towards India in the next 12 to 18 months,” says Vikas Khemani, Founder, Carnelian Capital Advisors.

It is one of those moments in the market where you can celebrate mentally by looking at the screen, you can feel happy that portfolios have gone higher but nobody is feeling happy or excited. There is very little participation, no euphoria and a lot of disbelief?
Absolutely that has been the characteristics of the market for the last many months. Everybody was overly worried about the US recession and its impact on India. A lot of people are sitting on cash, pessimism has been high and that is always the case of bull markets and good booms are built on the wall of worry or wall of scepticism. That is happening right now. That is exactly what we had written in our last few months’ letters. Pessimism is high, worries are unfounded and we have seen markets slowly climbing up bit by bit to everybody’s surprise in the last few months.

Has the time come now to start nibbling into IT stocks? Is a large part of the pain already in the price?
In general, we are quite bullish on the market and IT has been a sector which did very badly in the recent past, backed by the worries of the US recession and slowdown. Now the market seems to be getting comfortable with the US markets stabilising. Our view has been very clear that inflation has peaked out in the US, interest rates have kind of peaked out especially from the expectation perspective, we might have another 75 to 100 bps hike but it is already baked in the market.

With high inflation and commodity prices, food prices, and oil prices coming down, it is a very mathematical thing that inflation will come down. It can be in two months, three months or four months. It is just a mathematical equation and that will have to give comfort to the Fed which got surprised post Ukraine war. They had to act in a knee-jerk manner. As the interest rates peak out and Fed starts becoming comfortable, as pessimism is very high in the US markets, I guess liquidity flow will come through and markets will stabilise.

So once the sentiments around the US economy settles down, I am sure IT will also do well because IT per se did not have any problem. The demand was always good. Even in the last two quarters, all companies have had good order wins and the attrition problem is settling down. This quarter, we see it is getting eve better and the risk reward of the sector is in favour. They are not outrageously expensive. We continue to believe that IT is a sector which will do well.

Now that inflation is peaking out and the rupee is stable, are we in for massive inflows coming back via global investors into FY23? If that happens, what happens to the nature of stocks which will outperform and underperform because of the liquidity factor?
Absolutely, and this is precisely what we wrote in our last letter also. Three peaks have been made – interest rate, inflation and US dollar. Historically, in a 40-50 year cycle, whenever the Fed starts raising interest rates, the typical rule book is that emerging markets import inflation, their economies slow down and they generate negative returns.

Most developed market investors are pulling out money from emerging markets. The moment the Fed starts talking about raising rates and which is precisely what happened in the last 12-15 months cycle, we saw a massive outflow of over $40 billion. Now as that rate peaks out, we will start seeing massive flows coming towards emerging markets.

I see CY2023 as a massive flow year. It could be $15 billion, $20 billion or $25 billion – that is anybody’s guess. But I see India is progressing very well, there is no alternative economy or market which can offer the same kind of profile and everybody is underweight India. So I just see a very massive liquidity profile coming towards India in the next 12 to 18 months.

So you are expecting a big inflow to come in the next 12 to 18 months. Where will all that money go and how can investors make money? What is your tech on new age tech stocks?
There are some interesting plays which can be looked at but it is not about new IT and one cannot still come and say that everybody looks good. It boils down to looking at a company, business model and understanding whether they can survive and do well over a long time.

While some players are looking attractive, it is not where it should be. More importantly, we like companies like Zomato in the recent past but we see a lot of sales coming through and also there are some headwinds in terms of disruptions happening in the form of ONDC and the impact it will have. One has to be very careful in looking at them. It is never about new IT versus old IT. It is about whether risk reward is there and the business model is there.

If I were to see your top 10 holdings, I can see the lack of PSUs. A lot of people are saying that there is a case for rerating of PSUs. Look what has happened with the mid-tier banks and defence and railways stocks. What is your strategy?
We own Bank of Baroda in our portfolio. I think in general, we have been more in favour of private companies but we have not ignored the PSU space when the opportunity has been projected there, a rerating is happening and the business cycle is in favour. Some of the large banks, especially the PSUs have been repairing themselves. We found risk reward in favour of Bank of Baroda and we have taken that, but we keep looking at opportunities. We also own HAL in other portfolio which again is a very promising idea.

We never like or dislike a stock permanently. One has to look at the risk reward of the individual stocks. In investing, one should never say no to anything. One has to constantly keep on looking at and we have taken these two PSU names. So do not think that we do not buy PSUs. As long as we understand and see that things are in the right place and in favour, we will go for these stocks, PSUs by nature have a little bit of a compromised management style because of the non-continuity of management team. That has to be a very clear factor in the investment thesis.

You bought into Aditya Birla Financials pretty much like you bought into ICICI Bank when there was a change of guard. The stock is up Rs 40 ever since you bought it. Are you happy to hold it or is it time to reassess and is the one-time adjustment over?
We never buy stocks based on one-time adjustments. This is a very carefully bought story which is a very classic magic story where we can get both earnings growth and valuation rerating and we have a whole framework around that.

Aditya Birla Capital was good franchise, the borrowing profile is as good as Bajaj Finance but it kind of languishes for many reasons, especially the management reasons. Recently, we saw a change in the CEO, where Vishakha Mulye went from ICICI Bank to Aditya Birla Capital. I think she is leading a transformative journey out there. We were very convinced about what she is trying to do and the platform is good. What else do you want? You have a good platform and a right driver. CEO is guiding and organising a new direction and that is a sure shot or very good high probability recipe for rerating of any stock. We have probably seen a very early sign of correction. We do not buy stocks with only 40-50% return. We think it is a multiyear journey. and Vishakha Mulye is an exceptionally good leader as she delivers. The market will take note and it will get rerated further.