Market being sold a false narrative for past few months: Saurabh Mukherjea

Serious foreign investors - pension funds, sovereign wealth funds, endowments - continue to load up on India, says Marcellus Investment Managers CEO Saurabh Mukherjee

Serious foreign investors — pension funds, sovereign wealth funds, endowments — continue to load up on India, says Saurabh Mukherjea, founder and chief investment officer, Marcellus Investment Managers, in an interview with Puneet Wadhwa. Edited excerpts:

Have the markets finally put all the negative news behind it?

The stock market was being sold a false narrative for most of the past few months. Several decades’ worth of data for both the US and India shows that interest rate hikes during growth phases help sustain bull markets. It is natural that when GDP (gross domestic product) growth accelerates, central bankers start hiking interest rates to take some of the steam out of the economy and thereby dissipate inflationary pressure with the aim of helping the economic growth phase last longer. Unfortunately, this is not what retail investors are told — they are told that interest rate hikes and US Fed tightening are somehow a negative signal. Thankfully, most investors in India have now seen through this false narrative and are once again deploying their hard-earned money.

What’s your view on foreign flows?

Most foreign investors' selling is by ETFs and passive funds. This is by and large retail money from the Western world driven by Western pensioners acting on the advice of their IFAs and financial planners. Serious foreign investors — pension funds, sovereign wealth funds, endowments — continue to load up on India. No one in their right mind — in India or outside — is throwing in the towel on the only large investable Emerging Market (EM) that is left on the table after China’s self-inflicted damage and Russia’s descent into darkness.

Has the pace of flows picked up?

After a bit of lull in the first couple of months of the first lockdown in April-May 2020, we have consistently seen inflows of around Rs 100 crore per week in our PMS products. When Russia invaded Ukraine, for a couple of weeks the pace of inflows dropped to around Rs 50 crore a week. Then it recovered to the now familiar figure of Rs 100 crore per week. The mutual fund flow data has followed a similar trajectory. None of this is surprising — the Reserve Bank of India (RBI) has repeatedly said that 95 per cent of Indian households’ savings are in physical assets. Hence, as Indian households gradually shift their savings from physical to financial, we will see strong flows into the Indian stock market for many years to come.  

How big a concern is rising inflation?

Given the likelihood of elevated inflation as Cold War II commences, the worst possible thing that investors can do is seek the safety of fixed deposits, government bonds, corporate bonds, and other fixed-income investments; the odds are high that inflation will radically erode the real value of such investments. In fact, over the past 12 months, investors in the Indian government’s 10-year bonds have got a meagre 2 per cent return on their investment, which does not even exceed the inflation rate, making people lose their money in real terms.

The most sensible method to deal with a scenario of healthy economic growth, alongside elevated levels of inflation, is to invest in high-quality companies which have the pricing power to pass on the rise in labour and raw material costs on to their customers, and thus significantly outperform the market — both on fundamentals and on share prices.

What stocks have been on your shopping list?

In our small-cap portfolios, we have added Tarsons, a marketing leading manufacturer of lab consumables like pipettes and beakers, and Paushak, the largest privately owned standalone supplier of phosgene, an essential industrial chemical that is a controlled substance in India. In our large-cap portfolios, we have added ICICI Lombard and TCS. In fact, as far as we can see, TCS is the world’s only private sector company that trains or re-trains nearly 300,000 knowledge workers every year. Please note that all of these stocks are part of Marcellus’ portfolios, and since I am personally invested in these portfolios, I own these stocks as well.

Has the HDFC-HDFC Bank merger changed the way you look at the banking universe now?

HDFC Bank, HDFC Life, and HDFC Asset are all part of Marcellus’ portfolios. In fact, HDFC Bank is one of our largest holdings and the bank has been growing at a blistering pace in the past three years. The merger with HDFC, we reckon, will further accelerate HDFC Bank’s growth rate by allowing it to hold on to the mortgages and by allowing it to cross-sell other products to HDFC’s client base.


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