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Welcome to Market Masters. Of course, we have to have a market master because the Nifty regained its all-time high earlier this week and is shooting to new highs as we speak. Now, this is hardly surprising. What with the Indian economy chugging along as the fastest growing economy in the world, fastest growing large economy, yet the new highs are coming at a time when the Fed, the ECB and the Bank of England look determined to slow down their respective economies. So should 1 be wary of the nifty climbing at a fast clip from here on?

Are there dangers of a sharp fall later this year as a result of the global rate hikes? Can Indian equities rally or at least outperform even if the world slows? What are the best sectors and stocks to bet on year on? I have with me undoubtedly a market master, Manish Chokhani, Director, Enam Holdings. Well, that is a very small description of a person who knows so much about markets.

Manish, good morning and thank you very much indeed for joining us, even as the Nifty is hitting new highs. But let me zoom out and ask you to parse the global economy for us. We saw the US GDP data getting upgraded, which means there could be even more pressing of the brakes by the global central banks. So does the latter part of 23 look challenging?

Thanks for having me. You've given a very tough job to me with the amount of stuff you laid out there. I'll do my best to try and put some things together. So taking the first question head on, I think the context for all investors is to understand that there is really a change of leadership going on in the world, where the developed world has become old because of demographics, and they've become highly indebted because of the amount of debt that they've put onto themselves. And with the enormous amount of money printing which has been going on since 2008, and then just accelerated in this COVID crisis by just printing more and more.

And that is showing up as something which is leading to inflation, because in real terms, the consumption basket hasn't gone up. So they've taken world GDP from, say, $80 trillion GDP to in excess of $100 trillion GDP. But all you're doing is you're paying 25, 30% more for the cars you buy or for the Starbucks coffee you have or the hotel rooms you pay. Actually, it's a lot more than that. And that inflation isn't going away in a hurry.

And on the other hand, you have India, which is coming off a low base, where the profit expansion is still starting out. And we went from a low of 2 and a half, 3% of GDP to 4, 4 and a half percent of GDP as a profit number. But remember, we peaked at 7, 7.5% in the first decade of this century. So we have a lot of headroom to run.

From 1990 to 2007, China had that demographic bulge, the demographic dividend. And you know the wall of money they got both FDI and FDI, FDI mostly. Now we are at the cusp of that demographic bulge, in fact, already there. So can you elaborate more on this wall of money? Are we going to see it both in FDI, FDI, and even, you know, the GCCs, India, the middle office moving to India.

So if you think of it, you know, there are a lot of global trends which are actually playing into our favor, and we've done a lot of preparatory work for that. So let me first lay the scene in India for you, that if India hadn't done all the work that we've done in, for example, cleaning up our banking system, the insolvency bankruptcy code where assets can turn, putting in GST and creating a common market, putting in RERA, which allows real estate to actually, you know, then be traded with a lot more trust in the system. Also, the build out of infrastructure with the government's focus on roads and rails and logistics to get them moving. And the private sector has played its own hand in terms of building out the telecom infrastructure, the ports and the airports and so on. Power and all of that is actually in place for almost like a manufacturing renaissance in India.

Now, juxtapose that with the fact that Germany is no longer getting cheap fuel from Russia and that used to be the manufacturing powerhouse of Europe. And similarly, USA had pretty much outsourced its manufacturing to China. Now it's been a wake up call for both US and Europe that we need to have a lot more resilience in our supply chain and less poor dependence on 1 or 2 not so friendly economies. And in that way, and you saw what happened with Prime Minister Modi also when he went to US, that they're going out of their way to woo India and bring them into the fold, where we become a reliable supply chain partner. So now the advent of, say, an apple into India creates a whole new ecosystem for electronic manufacturing, the whole EMS segment, which is taking off the world that Tata's are doing with them and building up almost like a new Foxconn in India.

It unleashes what would have happened, say, 30, 40 years ago when Maruti came to India, or when GE came to India for the software services side. So it's a whole industry building out over there. And we're getting embedded into these global supply chains. And you have the skilled young manpower which the world lacks. What's happened is after COVID, this work from home, people not wanting to work, they've got wealthy, they're just not showing up to work, you can't outsource it to China, where do you go on scale?

So while we were the back office to the world for IT, It's increasingly become the back office of the world even for other services. So, you know, whether it's all the big 5 accounting firms or the management consulting, everyone is running their back offices on the services side in India. And I suspect this is slated to happen also on the manufacturing side. And we have done all the right things on a preparatory side with all the supply side reform in India to encourage all these players from overseas to come into India. So I think this trend accelerates.

You will find a lot of money coming on FDI side. Private equity is sitting with a wall of money also waiting to be invested here. And of course, like I said, on the FBI side, I don't think there's a single investment committee in the world which is not actively looking to see how they can up their exposure to India. So it's a market which, like I said, each time there's a dip, there are 10 people waiting out, and each time the market gets slightly overpriced as we were 18 months ago. There's maybe 5% or 10% of the money or the chips are taken off the table, but they're finding the reentry difficult.

If you look back at October 21, when we were much ahead of time, and we were almost at this 19, 000 mark on the Nifty, FBIs, I think, sold something of $30 billion magnitude over the next 12 to 18 months. And now to put the last $10 billion, which has come in over the last 3 or 4 months you're finding what's happening to the market it's accelerating very rapidly. You know

I'm sorry I'm stopping you because I've also got to play to the gallery and this is the bazaar audience they'll kill me if I don't ask you about How do you participate in this? I mean, do you, for instance, solar? There is no solar company, though we are going whole hog in solar. How do you play? Do you buy ACs?

How do you play with so many jobs coming to India?

So again, let's step back once. That number 1, I think as a country, we are under invested in equities. Because if you look at your asset allocation, and we, you know, save say $750 billion a year, while we are very excited with $2 billion a month inflow into SIPs, and it's maybe 20 billion, 24 billion a year, it's 24 on a base of 750. So it's 3, 4% of incremental saving is coming into equity markets from Indian investors. So I think as a young India, where we are 27, 28 average age, the profile of equity in everyone's asset allocation has to be higher.

You may pick your own companies, you should continue SIPs. No 1 can time the market. It is a high market. It's not by any means a cheap market where there's easy money to be made. But if you continuously keep investing into this market, which indeed a lot of young Indians are doing, I'd encourage you to A, get your asset allocation right, continue the systematic investment plan.

Then we have to worry about do I do it myself or do I, you know, look at sectors. By and large, the Indian fund managers are among the best in the world. I think if you look at records of people who run their funds for the last 15, 20 years, you'll find the compounding that they've done has been incredible. So there's no compelling reason for you to go out and say, let me jump in and make the money myself. If you like mid caps, you like small cap, by all means, you can buy those funds as well.

However, if you do have a special edge and like you said, if you're talking about solar as just an example, the most obvious thing is not to go and buy the solar companies, but the people who benefit from that solar. Now, if you think of India, Our Achilles heel has always been our lack of energy independence and we were dependent on oil prices from abroad. But now with the changes afoot, where India is becoming a leader in solar and we're getting our power costs down, we have still not gotten rid of all our coal and we are very, very competitive over there as well. A lot of the large materials companies and petrochemicals or steel or cement can use their own hydrogen, which they are creating to, in fact, lower their power costs. It may not yet be green.

It may be gray, it may be blue, or whatever route they're doing. But when you take that along with solar electrolysis, and you have the battery technology coming in, we will be at green hydrogen earlier than people expect. So with this energy transition going on, it's making the country a lot more competitive. And as the currency gets stronger and the interest rates actually remain low, it makes the manufacturing sector a lot more competitive to become a larger exporter. So when you're thinking solar, they actually spin off and the benefit may actually come to manufacturing.

It's not necessarily going into solar.

Got that. So manufacturing. Now, you know, the most important part will be what you're now looking at, IT companies are on the wane and it's banking and finance which has garnered a lot of investments. How would you play this? Is the past the prime in ITs?

Do you still go whole hog in banks even at this stage?

So, A, I'm not writing off IT and we'll talk about it in a minute. But since you asked about financials, again, like I said, just sit back and think. If we save $750 billion a year and we are still not even putting half of it into financial assets because it's still going into real estate and gold direct as we financialize the economy and with what's happening with, uh, you know, GST and everyone coming into the formal economy. Even now with what's happening with OCE and even the roadside vendor when he's starting to get credit, the payments being tracked with UPI or with all your use of PTM and other stuff. So all the flows are now being tracked and therefore the economy is getting a lot more formalized.

Formalization means it's a lot more financialized. And if that 750 billion of saving, which is also now compounding at, you know, the same nominal rate of GDP at

11, 12%.

It's the inflow into financial assets is very large. Within that, the share of the better run banks, it could be largely private, but also some of the leading public sector banks, their share of that trade becomes larger. And within that, the amount of products and assets which they can now, you know, array in front of consumers is again mind boggling. So you've gone from the typical housing loan to the consumer durable loan to then your unsecured loans. Also what they're doing on the corporate lending side, they also own actually all the insurance companies and the mutual funds.

So the whole area of what I call financial sector is available to you. And remember, our largest bank, even after the HDFC and HDFC bank merger is going to be what 160, 170 billion dollars. In a $4 trillion economy, it's a very, very tiny bank by global standards. The next straight SBI is going to be less than half of that market cap, which is our largest bank. So there's so much headroom.

If you just sit and think, where does this go 10 years from here, you'll be actually boggled with the size of the banking sector in India, which plays both onto the retail consumer side as well as onto the manufacturing and infrastructure side. It's sitting right at the center of that. So this is to me the leader of this whole bull market.

Got that. You know, this is throwing up more questions, Manish. How do you play financialization? Do you also buy AMC companies, insurance, stock exchanges, and How do you play this theme of jobs coming to India? Do you buy more consumption, consumer durable, consumer discretionary companies?

All those questions to Manish Chokhani after a very short break. Back in a jiffy. Welcome back. We are in conversation with market master Manish Chokhani. Manish, thank you for your patience.

Well, in your excellent presentation you sent me before this conversation, you point out that income distribution is rather skewed with in India, the top 110 million having the, you know, upper capital income of $8, 800 like Mexico and the next, you know, 150 million, having the economy of say, Philippines, $3, 000 plus and a large, you know, about 1000000000 people who have perhaps a thousand 300 dollars there about small like Africa. But you know, how do you play this when you're buying stocks? Should you concentrate on consumer discretionary rather than statements?

So again, you know, this is the best characterization I've had in mind. And each time when we used to service foreign investors as well, and people who are familiar with the concept of what they call terminal value. So the only country where if you project out 5 and 10 years, you still see continued growth exactly because of this kind of demographic. Whereas in the West, everyone probably has 2 homes and 4 cars and 6 telephones. It's the reverse in India.

If you think of this billion people, a billion and a half people. We barely sell 3 and a half million cars a year. Even if you assume the car lasts for 6, 7 years, they're just 2025 million odd cars on the road in India, which for a country of this size just tells you what's the headroom available. And for context, China and India sold the same number of cars in the late 1990s. China today is at 26, 27 million cars a year, which is more than maybe 8 or 9 times our size.

And the average car is 3 times the price of the average Indian car, which is 1. So it's not the Maruti, you know, it's the really the Toyota Altis, which may be the sort of benchmark car over there. Of course, they're going electric a lot faster. But But you get my point that the markets the car market size is 30 times larger. I'll give you a staggering number.

We are a hot country. We sell somewhere between 6 or 7000000 air conditioners a year. Just guess the number in China. It is 30 times of the size. It's in 220 million air conditioners sold every year.

So I still think of it, you know, as we will do 3 million cars, 6 million air conditioners, 12 million refrigerators, 24 million 2 wheelers, which is also now shrunk down to 16 or thereabouts in China, because they've all gone to cars, and so on. So This J curve of consumption lies ahead of us. The precursor to that, of course, has to be better jobs and people coming into the manufacturing or the services economy, the formalized economy. And the easiest way if you can't buy these stocks at 50-60 multiples is to pay them through the financials because a lot of these will be bought on financing, whether it's your home or your car or your consumer durable. And they've seen the excitement that foreign investors have in a company, say, like Bajaj Finance, which is valued more than some of the banks over here, because they see the runway and the way they use the analytics and the rigor with which they're running this.

So again, I think the center of this bull market to me will remain financials because they have degrees of freedom to swing between corporate lending as well as retail lending. And the average Indian is under levered. The average Indian corporate, after years of cleanup is under levered. The Indian banking system has actually never been in better shape. So while we are worried about NIMS speaking right now, I think we are missing the wood for the trees.

To speak the runway of decades ahead of us. And with this data analytics available, the civil scores available with what's happening with the IBC code and the fear of God and Aaron promoters, I don't think you see a repeat of what happened 10, 15 years ago with telephone banking. That era is over. So I think this becomes the centerpiece of the Indian bull market. They've also got financial tech inside.

Now imagine as we get richer and we are probably a 10, 15 trillion dollar wealth country. China is at 80 trillion, US is at 150 trillion. So even the wealth management space, whether you mentioned AMCs and wealth managers, of course it's a great space to be in. So again, it depends on how you want to play. Do you have the skill to go and do these?

But If I had 100 rupees, I could put the entire 100 rupees in financials and not worry about what's happening in the rest of the market, which is not to say that's how you should do it. You should have a different sectoral exposure and different company exposures. But in reality, serious wealth is made by getting 1 or 2 companies or 1 or 2 big trends right. And you look at the history of whether, you know, and I'm of course did it, you know, when they wrote the whole wave of Infosys and the IT boom, or say a Rakesh, he wrote it with, you know, the, the boom, he, he got entitled, for example, is holding on for 10, 15 years. And he benefited as the unorganized sector became organized for the jewelry business as well.

So you know you don't need to solve and win every battle you win 1 or 2 big ones and you just sit tight over there.

Okay yes yes all those are useful lessons The way Rakesh played even Crystal, the way I guess Anand played even Axis or Dane played. I guess all these lessons are there in front of us. Manish, I would want to pursue more with stocks, but Just a word on red flags. I mean, exactly the data you give us about how income distribution is skewed. Would that come in the way of economic growth?

This fast clip because we are leading, probably leaving many people behind?

Yes, that's a great question, Lata. And if you think of it historically, the way we ran our country was very, very socialist orientation and keep taxing the

5

million people and keep sucking more and more. And it is what I call an extractive, margin-oriented administration, which is how the colonial masters would have run it. What I find encouraging is over the last decade, we've moved completely to the other side where the governments become an enabler. So you're looking for velocity of the economy rather than extracting margin from your citizens. So when you do GST, you create 1 market and you allow people to run faster.

When you connect all the villages with electricity and with roads, you allow more trade to take place between them and you actually end up accelerating GDP. When you're allowing private sector to create infrastructure in whether it's ports or airports or telecoms or even in all the data networks that they're now creating or the retail networks that they're now creating. We're accelerating trade and getting more and more people into the what I call productive economy. And as a young population, the pressing need in India is jobs. It's not handouts, it's not freebies.

So the language which the ruling party has been talking of, let's stop the freebie culture and create opportunities, encourage jobs, bring in that competitiveness which is happening between states where Telangana is competing, Maharashtra is competing, Gujarat is competing, Karnataka is competing, Tamil Nadu is competing to bring in all these manufacturing jobs or service center jobs. That's really the way forward for our country. And I'm glad that is going in that direction. Whichever party is coming to power back of their mind, they realize if we don't create jobs, we're going to lose elections. So the red flag here is to me is if this narrative changes, and we do have big elections coming up next year.

And I am also burned by what happened in you know 2004 when you had that shining India campaign or indeed in 2009 when 1 thought Manmohan Singh is coming back with the nuclear deal. The voter has surprised us and the markets have obviously had a setback for that reason.

Oh yes all those red flags remain but India has done well as you know in political economy terms I would say. I guess it's legal terms that we are jammed I mean simply too much is getting clogged at a legal level. 1 is actually out of time. But what is the advice to investors in terms of stock selection? Should 1 go with, you know, look at profit growth?

Does 1 look at industry? What is your advice to investors when they pick stocks?

So let's have 2, 3 things. Number 1 is, you know, be invested in equities. I don't think 1 can time the market and say it's expensive. Let me get out and when it gets cheaper, I'll get in. So just be in there, increase your SIPs, increase your asset allocation to equities.

I think as a country, we are under invested in our own equities. Wealth creation is going to happen over here. And think long term. As a young India, what I did is, of course, you wanted to buy the mid caps, because then you got what we call the double engine, where you not only got earnings acceleration, you also got a P expansion. If you can find companies like that in sectors which you like, it's a great way to do it.

I still believe the centerpiece of this bull market for this decade is going to be financials. It's currently suffering from technical fatigue that you can't buy more than 10% of HDFC. Everyone says, oh, we end up owning financials. How much more can we buy? But you know what?

When I look back at the US bull market over the last 10 years, Everyone knew Google, everyone knew Amazon, everyone knew Microsoft, and yet those were the stocks which became the big wealth creators and concentrated the wealth creation over there. By the end of this bull market, I suspect it'll be the financials, which will be pulling and propelling this market up, Because a lot of our erstwhile great champions, as you mentioned, IT, pharma, which have been our export engines, are in the process of remorphing and reinventing themselves. So while they'll continue to do well, I think the real wealth creation still lies ahead of us in the financials.

Thank you very much, Manish. I began life as a banking reporter and still very much remain 1. You have given me renewed enthusiasm to change this theme with greater vigor, but that was excellent advice on how to look at India, how to stay invested and the optimism that you exude on the India growth story. Thank you