Let us talk about the current domestic economy and market strength. Inflation is in check as far as it being under the comfort band of RBI is concerned. We are expecting another 25 bps rate cut; fiscal deficit and current account are in check for our economy and for our markets. What are you banking on and how exciting will the next six months of this current year be as far as the markets are concerned?
Jigar Mistry: So, yes, in one line, India is the macro darling in an otherwise uncertain world. All the numbers you mentioned, the fiscal prudence with which the government has approached the central budget, inflation data, the WPI data, everything else seems to be checking perfectly fine. So, it is not the macro that is troublesome. It is actually the internal construct with which this seems to be moving.
In the last few years, the central government, the state government, and PSU capex have driven the majority of the gross value addition in the GDP and that construct now seems to be changing. The central government, in their budget, pushed through a lot in terms of lower taxes and giving money in the hands of end consumers. The state governments have been doing a lot more. If you add up all the announced freebies, that budget is now totalling almost the entire capex budgets of the states and what they have provided in the state budgets is a much lower number.
But despite that, the capex has slowed down from the states to a negative number and the central government has also pushed it out by one year. So, there is more money in the hands of low-income and middle-income houses and less money from the central government and therefore, we are seeing a slight slowdown in corporate earnings growth as well which is filtering through the lower activity. It is a great place to be macroeconomically, but it is the macro to micro switch that is a little confusing.
What is your view on the earnings season? It has been almost a week and more that the quarterly earning season has started. It started with the IT majors which were a disappointment, it was a mixed Q1 for IT and Infosys in comparison, did a little better but otherwise where TCS and other IT majors were and even midcap IT at present is not really performing. For banks and financials, expectations right from the quarterly updates and the numbers are also coming in those lines. Which sector according to you will be in focus for the quarterly earnings and where will the support come in from?
Jigar Mistry: If you zoom out and see where the last quarter ended, that brings the current quarter into perspective. Last quarter overall there were more hits than misses, if we compare the consensus earnings to the actual numbers that came through. Overall, there were more hits than misses but again the devil somehow is always in the detail. The growth was driven by a lot of cyclicals.
The larger weight components in the index were contributing negatively to growth, whereas the cyclicals and turnaround stories typically have a lower weight in the index and that contributed massively. Now, because of this, for the first time since Covid, we are seeing a consensus cut their estimates into the Nifty companies. In the past five years or so, we have consistently at the start and end of the estimates been almost always aligned or there was a slight uptick and that is resulting in some amount of cuts now. Coming to the sectors where we see things playing out, IT remains a challenge for the way we see this. Our belief is that essentially we are getting into an environment where the amount of new deal signs will be much lower. At the same time, the rupee depreciation will be much lower. When you combine these two, you will have pressure on revenue as well as on margins and it is not like valuations are cheap, relative to the history they are cheaper relative to the market. But that is not how IT acts because IT is a global sectoral play. Where we do see reasonably decent upsides in terms of earnings are pharmaceuticals, healthcare, specialty chemicals in some places, and obviously banking and financials is one place we are quite interested in.
Looking at this new trade world order, is there any red flag that can impact the strategizing of your portfolio in terms of sectors that you would not want to go ahead with? If you are overvalued over there, you might just want to cut down your weightages. As far as your portfolio management is concerned, do you want to just mitigate some kind of a risk?
Jigar Mistry: Yes, there are two or three things. One is the fat tail of the probabilistic curve and one much closer. Given the rise in retail participation, we are seeing some huge increases in the number of shareholders for many businesses. We call them narrative stocks because the growth in the market capitalization has been much sharper compared to the growth in earnings for these businesses.
Wherever you see those playing out, liquidity is a two-way sword, that comes easy and goes away easy as well. Wherever you see a huge increase in market cap and a commensurate increase in earnings and accompanied with a very large increase in number of shares. These are the businesses we are a little wary about.
Secondly, look into this situation where there are very strong singular monopolistic businesses. Like liquidity, monopoly also works in very questionable fashion because what can be given with the stroke of a pen can be taken away as we are seeing with one of the exchange companies on Thursday. We saw this with the gas companies earlier and now, we are seeing the same with these businesses, essentially where the reduction in administered price took away the monopoly of these businesses. The exchange of power was dealt with in a similar manner. Many of those businesses have a singular party ordering and when those are trading at 50-60 times, I would be wary of that.
The last part is and maybe we can call this a fat-tailed philosophical line of thought, but historically wherever there have been revolutions, go back to the agricultural revolution in 10,000 BC or the Dutch, English, and French revolution 1600 to 1800s, there has always been an accompanying conflict with it. As AI takes over, that is one area where we should be a lot more prepared to face several types of conflict. Therefore wherever you find a lot of excess being built out, it makes sense to get a little more defensive along the way.