Arindam Mandal, Head of Global Equities at Marcellus Investment Managers, believes tells Ananya Grover in an interview that investors should look at consumption basket, future liability, and the diversification aspect for strategic allocation to global markets. He manages the group’s Global Compounders Fund had Rs 300 crore AUM as of October end.
1. What is your portfolio tilted towards given high valuations in the US?
We typically focus on U.S. and European listed equities; it’s a developed market fund largely. US for last three years has been kind of a lopsided story around AI. Towards late last year, we looked at the valuations, and thought let’s take a step back, as some of the valuations are probably little more extended. We looked into the other parts of the market and found that there are things trading at a much cheaper multiple. So, we tilted the portfolio towards that, good companies having some cyclical issues. We understand that in near-term there might not be catalysts for these names but typically we look for longer term, that is where we tried to position our portfolio. The portfolio is not that top heavy, if you think about what S&P or Nasdaq. We don’t have NVIDIA and Teslas of the world. We are in some of the mega-caps but not in the pricey ones or where we are concerned on the cycle.
2. What macro factors are you watching for?
If a full-blown recession is your best case, then any equity is not safe, be it India or be it Europe. If the US goes into a recession, proper recession, not the technical recessions, then it is bad for everyone. But if it doesn’t, then probably this is a decent case, the slowdown that I have seen in the consumer side or manufacturing side, they might play a cyclical catch-up, that typically industrial production grows at around 1-2%. Last three years, they have either de-grown or they have not grown. So, you might have that catch-up, the COVID excesses that have been absorbed now, so you get back to the normal trajectory. So, that is what we think might be the case. What can be a game-changer? It is how the unemployment rate is changing in the US and the real wage growth.
- What other regions are you seeing value in?
We have tilted a little bit towards Europe, given the valuations of similar kind of sectors, stories are much cheaper in Europe for certain stocks. For example, we invested in a company called GE Aerospace. We have long term faith in the company, but at the same time, they have a JV called Safran, which is listed in Europe. It manufactures aircraft engines. It trades at almost around 40% discount to GE.
- How are you seeing valuations of emerging markets including India?
Comparing China’s valuation versus India or India’s valuation versus US, is probably not fair because they are very different markets. The best way to look at it is relative to your own history, where do you stand? Because the return on equity profile is very different across countries. For example, China’s ROE is always very low compared to India. So, India always deserves a premium compared to China. India is trading definitely higher than its long-term median, especially on the small-mid side, large cap is fine and China is trading in line with their historical average. If you think about last, August-September last year, there is a huge discount, these markets, be it Europe, be it China, they are trading at but in the first half, that gap got closed in terms of their own relative valuation versus where they stand now. So, from here on, the question is more around, can your numbers keep going up?
5. What has driven appetite for offshore investments in India?
There is a recency bias in general for every investor, when two or three years back we were talking about this, no one was actually interested at that point of time because US was coming out of a very bad year. Global markets were actually flat or down, mostly down actually, India did okay, was slightly up at that point of time. Now that the Indian market hasn’t done anything so it’s looking backward and saying I missed out on this thing. But in my view, it is a strategic allocation for any investor. Indians are getting wealthier over time and diversification is a need. None of us know if India will do well next year or US but whenever the market is giving you a relative opportunity, just take that. The appetite is increasing but it should increase sustainably. Look at your consumption basket, future liability, and the diversification aspect, these are the key drivers of strategic allocation.
- Do you think regulatory approach aligns with this appetite?
If you want to make GIFT a global hub you are comparing Singapore and Dubai. You cannot say that I facilitated you only when you sent me money. We always talk about Chinese people buying US treasury. If it stopped buying, then the US treasury will not find any buyers, etc. So, they became that important to the global market because they control a certain part of treasury. As a country, we should also be there. We are very strong in terms of our fiscal position but at the same time, there is we have seen different times when our forex was actually close to zero. So, I think it is kind of more gradual change, you don’t want to see a ton of flight of capital from your country. Even China has that. So far what I have seen is that regulator has been very supportive of these things, they understand what we are trying to do. They are actually serious about a global hub.