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There could be some short term volatility following tapering but I do not see a very significant impact on emerging markets or on India either, says Pankaj Murarka, Founder, Renaissance Investment Managers.

You have seen earlier taper tantrums and how the market had coped with it. Can you tell us how emerging markets, the growth oriented ones like ours with demographic dividends etc. could manage to cope with all that?
The context of the 2021 taper tantrum is probably very different from the 2013 taper because in 2013, when the US Fed had announced the taper, it had come as a surprise for markets globally and the markets were not prepared for it.

This time around, the Fed has been spending some time preparing markets well in advance and guiding that probably the start of the taper will be somewhere towards the end of this year and run through the course of next year. So to that extent, markets are anticipating and are well prepared for that. Also, India of 2021 is very different from 2013 because when the taper announcement happened in 2013, India had double digit inflation for four years preceding that and which is why when the liquidity moved away from emerging markets back to developed markets because the rising dollar hit India very badly.

But this time, over the last three or four years, inflation in India has been well under check and we have an inflation framework. India is in a far better position this time around to be able to taper. Also forex reserves are significantly superior this time compared to last time. There could be some short term volatility but I do not see a very significant impact on emerging markets or on India either.

Let us talk about your concentrated portfolio. I really like the mix. You have financials as well as good dollops of consumers and pharma. You are expecting around 25% growth in earnings for your concentrated portfolio for 2022 and around 20% in 2023. But how much of that is on track for the quarter gone by?
The change this time around is that over the last four or six quarters as economy started unlocking in July of last year, we have seen very robust or encouraging commentary from corporate India, largely because the large part of deleveraging process which was going on in the economy over the last three or four years, has largely played out and now companies have a very strong balance sheet, especially the large ones and more importantly, because of strong underlying demand recovery that we are witnessing in the economy, companies are looking forward to go back and make fresh investments in their business which they have not made for a very long period of time.

So after a very long period of time, I see a very high level of business confidence amongst corporate CEOs and they sound very optimistic on the outlook for their business over the next two to three years. I think we have seen something similar or heard something similar from our portfolio companies as well.

A report put out by ICICI Securities says that a new capex cycle is starting off in a big way because free cash flows are very healthy, the healthiest they have been for Indian corporates in 10 years. How long do these cycles last?
One of the largest capex cycles that India has witnessed in the last 20 years was between 2003 and 2008 which lasted for almost five or six years. But because of the global financial crisis and over investments, our economy did hit air pockets and we took a fair while to absorb all that capacity. But I must underline the fact that structurally Indian economy today is very different from what it was 10 or 12 years back and we have done a significant amount of structural reforms in the last seven, eight years to enhance the absorptive capacity of the economy.

If we really manage our economy and the macro drivers well, then once this capex cycle gets going this year, this can be a very long spell. In my view, this cycle can really surprise all of us on the upside and probably can sustain for 10 years because as an economy, India needs significant investments in all the pockets of the economy. We could be in for a very prolonged cycle.

Tell us incrementally what are you researching or reading these days?
We have been spending a lot of time on the potential investment cycles that are likely to unveil because we firmly believe that there is one on the horizon and we are already seeing green shoots of that across different sectors of the economy.

Just to give you an anecdotal example, all the metal companies want to make this year the highest cash flows that they have ever made in their life and this holds true not only for metal commodities in India but most of the global metal companies as well, which effectively means that over the next five, seven years, they are going to make significant investments into new capacity creation.

Likewise, other things that excites us are some of the disruptive technologies that are emerging and which can have a significant bearing or influence on the economy and in consumer behaviour be that across electric vehicles or use of hydrogen as a fuel as we transition the global economy towards clean energy or renewables.

Some of these new emerging technologies which would become a significant part of our ecosystem are very exciting from the next five to 10 years point of view.

What do your interactions with your big clients suggest right now?
The exposure to equities or the contribution of equities in India’s overall household savings still continues to remain very low. But the good thing or the silver lining is that investors across the board and even in some of the smaller towns and cities have started understanding equities in a far more mature fashion and they understand that equities are cyclical asset classes. It goes through its cycle. So a disciplined investing approach is needed and probably a slightly more long term approach to stay invested in equities.

So that kind of a mindset is getting created where people are now looking at equity as a core asset class rather than just an asset class where they want to park their money, make some money and move away or a tactical asset class. People are realising that equity is a core asset class which has to be held on to for a long period of time and they want to increase their exposure to equities because even despite making allocation the overall allocation to equities still continues to remain low in relation to where it logically should be.

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