Sanjay Mukim on how to navigate expensive markets with a strategic approach

“From a market perspective, yes, there will be weeks where people feel happy and people don’t feel happy but the underlying causes of uncertainty still remain,” says Sanjay Mukim, JP Morgan.

Nikunj Dalmia: Let me start with your world view. Two weeks ago, there were multiple concerns in the market, what will happen to China, Middle East, US macro data. But surprisingly, all those worries have been left behind. So, what is your view of the world? Are we returning to stability after two weeks of intense volatility?
Sanjay Mukim: There are two answers to your question. One of the underlying volatility drivers is still up. It’s not like we’ve got resolution or clarity on many of the questions being asked about the uncertainty in the Middle East and Europe or the outcome of the US election. Sentiment in the equity market is something that goes up and down and can be very fickle.

Today, he loves me and tomorrow it may be that he loves me, no trade. What we really want is to properly answer some key geopolitical questions. And maybe after the US elections, we’ll get clarity on where it’s going. So, from a market perspective, yes, there will be weeks where people are feeling happy and people are not feeling happy but the root causes of uncertainty still remain.

Nikunj Dalmia: So, what should one do in this kind of world where valuations are not exactly cheap, uncertainty is back, but the strength of liquidity will ensure that losses are limited? Because those who are buying now are afraid of valuation. For those not participating, they may be missing out on liquidity benefits.
Sanjay Mukim: you are right And that’s the lesson we’ve learned over the centuries, really, most asset bubbles that form and I probably shouldn’t use bubble valuation, because who knows where we’re at, but asset inflation is primarily a liquidity phenomenon. And a correction or correction in valuation will also take place when this liquidity starts to withdraw for any reason.

And so far, there doesn’t seem to be any imminent threat to it. We can’t predict, at least, let’s say in India, why the flow, if any, will slow down and that’s why people feel pressured to continue participating. But your point is very valid that it is the liquidity position in the flow that dominates the styles and determines the trends of the markets in the near term.

Nikunj Dalmia: Do you think the China comeback trade is the real deal or is it already over?
Sanjay Mukim: I don’t think it’s completely over because there’s enough communication being done by the Chinese government on the way forward. They’re considering the next actions, the stimulus, and you’ll see, I would imagine, actually more announcements coming out from Chinese policymakers in the next few months and it’s not just a matter of the last quarter of 2024. And so, you will continue to see different kinds of mood swings in China.

If the government announces a major policy move, we will see the market get excited about it again. If policy action disappoints expectations, you will also see corrections.

But we are at the beginning of a phase where for a certain period of time, for the next few months, I would argue, you will see continuous policy announcements from the Chinese government. So, I don’t think it’s over. It certainly looks like the beginning of some change.

Nikunj Dalmia: So, if I can encourage you to divide the Indian market into three big buckets, cheap and ugly, purely in terms of price action; Expensive and excessive purchases, which should be avoided; and fair and good, where combination may still take place.
Sanjay Mukim: The last part is easy. Growth at a fair price, that’s the Peter Lynch screen that traditional investors often try to use, that basket is relatively empty and if you’re modeling it somehow scientifically it’s just Indian financials.

Largecap banks or let’s say small banks, some set financials as growth stocks with reasonable valuations. The trouble as we have all seen is that the sector has been under pressure for some time now.
Just performance-wise, it hasn’t been in line with the market and now we’re seeing some pressure on the revenue momentum there.

Therefore, there are good reasons to believe that the pace of growth for financials will slow down. Cheaper, objectively, you’ll find some utility companies, I think. I wouldn’t really classify it as an ugly basket, but utilities probably haven’t re-rated as much as the rest of the market and you can find something in that basket at a low double-digit PE in India.

Almost the rest of the market falls into the other, expensive category, whether you measure it against their own historical price-to-earnings band or against peers, the rest of the world, the market; Except financials, utilities and a handful of stocks here and there, almost everything qualifies.

Nikunj Dalmia: In your strategy note, you are recommending what can be called the barbell strategy. You invest in defensive functions, but on the other hand you invest in what is known as cyclical and industrial. Why are you advocating the barbell strategy at this time? What is the idea behind it?
Sanjay Mukim: There are two incentives. One, of course, if you are investing in India, you must look at India’s long-term growth potential and this applies to both domestic and foreign investors. An attraction to look at the Indian economy is the medium-term growth potential. And we have done a lot of research, others have done, to justify the view that India will continue to grow at a very decent clip for many, many years into the future.

And so, you’re always tempted to look for stocks that are open to that growth and that could be cyclical, that could be discretionary type companies in India and that’s growth.

It comes with a reasonable price tag attached these days, but there is always a bias. The reason for the barbell is that we are getting signs of a slight slowdown in the economy in the near term. This may be backward looking as we have had elections and the monsoon has halted activities. Government expenditure is low. So far, the central government’s annual expenditure has been low. And the response from corporates to the results, at least in the near term, has been somewhat mixed. And again, given that valuations and expectations are so inflated, it makes sense to be a little defensive very strategically in the near term. So, yes, long-term beta growth stocks in India have appeal, but at the moment it looks like we’re hitting a bit of a rough patch.

Nikunj Dalmia: Why is the pattern changing dramatically in India? Last year at the same time, it was all about the rural slump and urban consumption spike. Now, it’s the opposite. Why are we seeing such a sharp divergence in such a short period of time?
Sanjay Mukim: As a nuance to that question, we argue that it is not necessarily an urban versus rural divide. It’s not a rich divide more than a rich divide. It is more about savings mobilization during a pandemic.

Wealthy households, people who are maintaining their income, working from home during the lockdown, have seen a significant improvement in their savings, in addition to the asset inflation that we’ve seen, whether equity or real estate has affected wealth in a certain top group post-Covid. is Indian consumers.

But if you’re in the lower, let’s say, 80% of the economy, you’ve actually used up the savings through the pandemic. When one, fortunately, didn’t have too much trouble surviving, I would argue, but you had expenses that cut into your savings.

It’s a bit of a balance sheet problem for low-income families, I would imagine, and that’s the difference we’ve seen. Another argument that is made is inflation. Perhaps the inflation experienced by households is higher than what is printed in our calculations.

And for various reasons, so the sentiment, and the RBI does this survey, consumer sentiment data, is still not back to where it was in 2019, almost there. And remember, 2019 wasn’t a very strong consumer year to begin with. So, it seems that the economy is taking its time.

It is taking some time for consumers to regain confidence in consumption and that is why we have seen sluggish behavior among the consumer basket of, say, the top 10% of Indian households versus the bottom 90-odd percent. In theory, this should converge, whether it is actually happening now is an open question.