Shyam Sekhar: Benchmark hugging makes for bad investment

Because of the rotten system, the investment approaches of many fund managers have become very near-term oriented. Many of the people have




lost the courage to move anywhere away from benchmarks, Shyam Sekhar, Chief Ideator & Founder, ithought, tells ET Now.Edited excerpts:When mid and smallcap stocks go higher, market says stock market mein satta ho rata hai. Weak hands are buying into stocks and that is a bearish sign, a red light, so to speak. When institutional investors suddenly start buying megacap and largecap stocks, markets would say it is because of liquidity and we should not get worried about it. Benchmarking has hurt the freedom of institutional investors to invest based on what they think will do well in the long term. Too much of benchmark hugging is happening. I would blame it on the way the mutual funds manage their fund managers and their performance internally. I am sorry to say but that system is rotten. Because of this rottenness, the investment approaches of many fund managers have become very near-term oriented. It is more job hugging. Many of the people have lost the courage to move anywhere away from benchmarks or the performing parts of the benchmarks. So, the investing is very much towards the ordinary while markets are rising. What is your general view on the market and the economy? This market has managed to climb the wall of worry. Now we can argue whether earnings are strong or whether earnings are not strong. Look at FMCG, earnings are strong. If you look at corporate banks, earnings are not strong. Depending on your prism, you will have a different answer. But are you pleasantly surprised that from bombed out levels, the recovery has been very strong and very swift? The consumer space has done very well because of the base effect, the pre-GST slowdown in the market as well as the demand effect on the base. All these things have created a nice optical place for consumers. People have really paid 10-20% more based on the current earnings. We should look for some more quarters before concluding that it is structural. The consumer space has run ahead a bit in the last few months. This again is driven by chasing near-term performance. But there are other parts of the market which should benefit from structural reforms done by this government in the last three-four years which have really not translated into economic growth the way we would like it. But that reform will play out sometime over the next two-three years and I distinctly see an unwillingness among the institutional investors to go anywhere near it. Except for one or two fund managers, the rest are all not willing to go anywhere near it because they do not see the near-term benefits of earnings. We are in a market where it should be more value than growth driven because the growth anyway is paid adequately for. That adjustment has to happen but I do not see that happening among the institutional investors so that they can make that adjustment and wait it out for one or two years and make much bigger money for the investors. The hunger and the risk appetite is very badly wanting. You are warning investors to be careful about private banks citing expensive valuations among other reasons. Beside valuations, do you think it is also a case of money moving out of private banks which have already run their course and have been great compounding stories for not just months but years put together? Maybe money is moving towards corporate banks or even PSBs in the month gone by. I see it in two parts. One is money that has moved from the public sector banks to the performing private banks, but there is a more important part which is the trade away from the non-performing private banks to the performing private banks. People have sold the Axis and ICICIs of the world and put all their money in the performing private banks which is your HDFC or Kotak and some others. Now that trade has is overdone. A time correction can be painful even when people have bought good companies. We are forgetting lessons from past cycles. When you pay too high a price even for the best of companies, you will either make no money for quite some time or even a loss in the near term. That cannot be escaped and we seem to have forgotten that lesson.That basically does not conform to tenets of sensible investing. Where are we in the commodity cycle? A slew of hikes have been initiated by steel companies. Even after almost 20-24 months of an upmove, there is still more in store. How are these companies positioned in the business cycle? The cycle does not seem to have peaked yet. One thing that we need to understand about steel is that the government is definitely ringfencing our markets from the global markets. Looking every day for news from China or global markets and then deciding our investment positions on the larger Indian steel companies does not make sense to me. You must have read the steel policy which is in the public domain. I think that importing steel can have a very serious impact on our trade balance and on the dollar equation. Therefore, it is very imperative on the government to support the steel industry and make it supply most of the steel that we require and reduce imports to the barest minimum. This policy direction has taken on a serious proportion long back and we are going to see this play out for quite some time. Interestingly, I do not expect political dispensations to matter in this area. Post 2019, I think, we will continue with this policy framework. This is something that provides reasonable visibility to Indian steel companies that have already created or acquired capacity and are in a position to ramp up production. It is not very difficult to see that demand growth in India will be high single digit at least for the next three-four years for steel. All that augur well for steel. Looking at metals as one basket or commodities as one basket, does not make sense to me. You should look at each item or commodity separately and understand the global dynamics, the industry dynamics, government policy and also which are the companies positioned to take advantage of all these things. That is what one needs to do with respect to steel and all the other metals and commodities as well.Market measures good private sector banks, on price to book ratios. Whether that is good or bad is a separate question but that is the benchmark which we use to measure a financial stock now. Whenever banks need capital, they raise capital. As a result, the price to book never expands to a very large number. How does one judge that four times book is bad for HDFC Bank because four time price to book for HDFC Bank has been there for last eight, nine years and every time when the stock price goes higher, they raise capital? I would view it slightly differently because in a technology driven banking era, that may not be the right way to look at it. I will ask you a different question; how much capital does it require for a very good management of another private bank to do better than what HDFC Bank has done in providing a technology enabled solution to its customers which is superior to HDFC Bank?The other thing is you should look at it from the consumer side. ,How much delight is HDFC Bank giving to its customers? It is a very ordinary bank. Try banking with them and you will understand. We are delighted that they are able to retain customers with such ordinariness. Ultimately we are not looking at it on a 360 degree basis and I think that whatever they have done in the modern era where technology is freely available and talent is freely available and talent is mobile also, we are going to see people move from one bank to other banks. In this era, giving a premium for a name is something we should judiciously do. I think we are going towards the other end of the spectrum right now.What are your view on HFCs? Two-three years ago, HFC was the go-to sector and with HFCs came the extension of low cost housing. This is one sector where everyone including NBFCs and PSU banks have entered. Do you think there is a froth in the HFC space? Suddenly, a segment dominated by four or five players has at least 25-30 players now?Going forward, over the next five years you are going to see that the kind of creditworthiness related knowledge. Your ratings and the customer is going to be much easily traceable, the good customers are going to be become more easily chase-able because of the way we are going to rate individuals. In the future, HFCs are going to become one of the most commoditised part of banking. I am convinced about this. The second part is that you are giving higher valuations for companies because they have done very well in the past and they had a certain run rate. If the business becomes commoditised, those valuations may at best taper down gradually. Another aspect you need to understand is that this is probably the one space in financial services where everybody has rushed in and competition is really going to grow. When a space does very well everybody wants to have a part of that pie and you have seen all kinds of players get in and everybody has very high growth aspirations. Everybody wants to play catch up and all this is not really going to augur well for spreads. It is not really going to augur well for the established players also because there is no great differentiator in the space. A loan is a loan, it is all about how much you are going to borrow and at what rate you are going to lend it. The customer is somebody who is going to lend from someone else if it is available at even 0.25% less.I do not think there is any stickiness in this business. These are some of the things which we have forgotten because of the past performance of some of the fine companies in the space. We should not be biased at this point. We should look at what it can be five years down the line. In my view this is a business that is going to become crowded and commoditised. One must remember that.

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