The 2017 Morningstar Investment Conference was held in Mumbai on October 10-11. At the conference, Kaustubh Belapurkar, Director Manager Research, Morningstar Investment Adviser India, chatted with Anup Maheshwari, CIO - Equities of DSP BlackRock Mutual Fund.
Can you share your insights and wisdom around the market cycles?
Investors have a habit of categorizing styles or investment philosophies as growth, value, et cetera. We generally believe that they are all connected. There is no one individual style that one should necessarily define oneself by. Most of these styles across the spectrum tend to converge through long periods of time. Value has done very well over long periods of time; so has growth. Every style has its own cycle. At the end of the day, we are all looking for growing companies at the right price.
We've seen through various cycles starting right from 1992, 1993, the mid-cap boom up to October 1994. A bit of a cyclical phase in 1995-1996, engineering stocks doing well, then pharma stocks, then consumer stocks and then, finally, the big IT boom. After that, PSU banks did very well for a few years and then this overall bull market.
Through various points in time there have been few parts of the market that have stood out relative to the rest for delivering good growth and typically, they start off at a fairly low valuation and then by the time that cycle is complete, they have overpriced themselves. The key is to identify certain changes and trends, where is growth progressing, where is it available at a reasonable price and then try and participate in whatever is available. So it's growth-oriented in some ways keeping an eye on reasonable valuations.
The whole point of the market in some ways is to judge companies on incremental return on capital (ROC). Everybody is in business to earn RoC and companies are evaluated largely by the RoC they generate and incrementally whether that's heading higher or lower. Our big emphasis is on looking at businesses that are growing where the incremental RoC is rising and relative to that which we feel are reasonably priced. There are lots of other softer ingredients, management quality, scalability, et cetera, that go along with it, but broadly, this is at the heart of how we identify companies.
Processes evolve through time. I can't for a moment say the processes we have today were the same processes we were following 20 years ago. Assets grow, teams grow, processes evolve and systems get strengthened.
What are the challenges to growth right now?
I think there is zero doubt about the fact that India is a very structural story. If we go back in time, the closest comparisons maybe Korea and China to some extent - those economies are where we are today about 15 to 30 years ago. Look at the per capita GDP progression and change in consumption behaviour. With just the increase in per capita that should come, with certain penetration levels, looking at over the next 15 to 20 years, there is a whole bunch of sectors that can grow anywhere between 8% to 16% compounded.
Right on top of that scale was actually housing finance, and at the bottom was something like soaps and detergents. There is a lot of scalability in the long term across a whole range of sectors as our economy matures and as our per capita GDP keeps rising. Everywhere we go, on per capita numbers, India is probably the lowest. But as it increases, consumption patterns will change. It's a very secular story.
From an investing manager's perspective, the key is to try and find long-term secular ideas that have a good 3-year outlook and ideally also are looking good over the next one year. And if you can sort of marry all three together, that's where you have to express your conviction in a much higher fashion within your portfolio. Different businesses perform in different periods of time, but you want some part of your portfolio that is aligned across multiple dimensions.
It comes down to profits and profitability and growth of profits and incremental RoC. Different businesses have their respective cycles. That's what creates the alpha for fund managers. There is always something performing at some point in time irrespective of the overall market behaviour. We got to keep looking at those bottom-up opportunities with the comfort that even the long term looks extremely good.
Going forward, is it going to be more of a large-cap focus?
Just on valuations alone it's quite clear that large caps are looking a little better as you go down the market-cap chain. In the last four years, the story was that literally the smaller the company you bought, the better it performed irrespective of your ability to select stocks. Even random portfolios built based on market cap, smaller ones would have outperformed the larger ones.
The starting point of valuation isn't in your favour as far as really small companies are concerned. There are some great companies out there delivering good growth, with good managements and will scale up through time. But you have to have a much higher degree of confidence in those companies with current starting points of valuation.
We are finding a little more comfort as you go up the market-cap chain. SEBI has defined the market-cap levels and we think the 0 to 200, up to 250 sort of band is really the interesting market-cap band where it's clearly better valued than what's beyond 250.
But this is a very bottom-up market. There would always be some businesses that you will find in the mid-cap space that are going through an interesting curve in their business cycle or some changes. I mean, the level of entrepreneurship in our country never ceases to amaze. There are so many managements you come up across, interesting businesses.
But overall, the starting point for mid caps today is definitely not an ideal starting point for the risk it carries.
Should investors also be looking at some of the global strategies?
By 2030, we will be amongst the top 3-4 countries in the world by GDP. Logically, market cap tends to follow.
Having said that, I find it quite amazing that still India is so un-owned in some ways in global portfolios. It has a 1% weight in the global index, 8.5% weight in the emerging market index. Given its structural capability and growth through time, I think it will become more and more a prominent part of global portfolios.
At this point in time, emerging markets are actually cheaper than developed markets. Way back in 2007-2008, every market in the world was at 140-150% market cap to GDP ratio. Today most developed markets, the U.S., U.K., Japan are at 140% plus, but emerging markets are all 100% and below as a percentage of market cap to GDP. So, unlike the last five years where developed markets have outperformed emerging markets considerably, we think a slightly different story may play out over the next five years.
I would say, we are still more comfortable marketing India to a global audience than marketing global markets to an Indian audience at this point in time.
