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Overseas equity in domestic debt a perfect combination: N Jayakumar

The economy is going to bottom out somewhere around December-January-February.

ET Now|
Updated: Nov 13, 2019, 02.11 PM IST
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ETMarkets.com
N Jayakumar-Prime Sec-1200
New investors are coming in from across the world into the Indian financial services. Also, any number of overseas funds are ready to give last-mile financing and people still do not understand this. This is not equity financing. This is priority financing which will get paid off first but projects will get completed and ghost towns will start looking completed, says N Jayakumar, MD, Prime Securities. Excerpts from an interview with ETNOW.

For the last three years, value proponents like you have been making a case for starting to take some risk, to come out of the shelter of good governance, good return ratios. But those arguments of buying into cyclicals or other stocks which offer deep value and some degree of valuation comfort, have not made money. Should we genuinely move out of these hallowed stocks?
My first point is that I do not think the idea is to junk governance and say get into non-governance as a contra call! You must go back to the SEBI directive that we talked about where the concentration of portfolios were in the top 100 and the top 250.

The classification was changed.
That is right. What that essentially meant was that the big became bigger as far as market caps are concerned. It also suited the disproportionate rise of stocks like the 60-70 PE stocks which in any case had low floats. They had what I would call career investors -- people who held on to Levers and Nestle for years and never thought it necessary to sell and especially for those who believe that you must stay invested in the markets. This became a better proxy than pulling out and putting money in anything else because most of these investors have remained investors right through.

What that essentially has meant is that the incremental demand was disproportionate. The stocks kept rising and many of these stocks have had no new issuances. They have had new investors and new money getting allocated repeatedly. I think it created a bubble situation compared to anything else in the world. You could argue about the inflection point. We have been arguing at least for six months now that it is time to move out of the shelter of these stocks because the markets are expanding upwards. We did make a brave call on 10,600 on your show. That was bought in. I had said you have nothing to lose except a fixed deposit rates, go out there and invest right now. And that is the way it has turned out.

The disproportionate returns given by some of the midcaps in the turnaround has been high. A large private bank where till recently, people were talking about bankruptcy pricing, has given over 100% returns from their bottoms.

Rs 40 has become Rs 72 for YES Bank.
We are conflicted in some sense but yes that is a classic case.

Something like RBL also.
Take RBL, take YES Bank. The thesis actually is much more than just branching out into smaller stocks. The thesis is that there are times in life where the markets tend to be excessively positioned on one side which means in terms of an index people feel that the bottom is going to fall out. We did talk about this exactly two-and-a-half months ago in your show. We said the markets bottom out six months ahead of the economy. The economy is darkest before dawn and really the latest readings of the economy have been really bleak.

But I am still going out there and saying as I did say three months ago that come January which is approximately six months after the bottom was formed, you will start seeing economic numbers. What will create it? No idea. Is it so very obvious that the markets are telling you that the economy is going to bottom out somewhere December, Jan, February around that time.

What if markets get it wrong? What is it we look back and say look guys this is all liquidity, it is all global allocation. Iit is all what happened with emerging markets and what transpired was we got flows and we got lucky because of the interplay at emerging markets?
This is a flip side to it. The economy got killed because of liquidity. Bring back liquidity to the economy. The entire thing has been about how do you transmit money. The government in all fairness has had the right intent, maybe not the right implementation at times because they are also grappling with what exactly to do, how to transmit. The word transmission has been used more often by a finance minister in the first six-eight months than I have ever seen in the history of this country.

It will take time for the money to transmit but I have been tweeting that the real estate and the NBFC space needs have to be addressed. Why? Because the NBFC gets credit back into the system. The real estate space actually starts monetising the oldest asset as far any Indian is concerned.

And it has a great multiplier effect on the economy – jobs, infrastructure, the works…
It absolutely does. We tweeted about it two weeks ago saying this exactly. Other than the stamp duty cut, virtually everything else that has been talked about has actually come through. This is very different from the past because of three things. One, in the alternate investment fund (AIF), there is an amount being talked about. Two, the cast of characters has been given. And three, it is largely a set of people who got independent charge. This is not going to be monitored by RBI. It is AIF structure and investors will come in the sense that you start the process with say SBI, LIC, etc, putting in Rs 500,000 crore each.

Any number of overseas funds are ready to give last-mile financing and I think people still do not understand this. This is not equity financing. This is priority financing which will get paid off first but importantly projects will get completed and ghost towns will start looking completed..

And the fisc is not getting compromised. If I recall our last time’s conversation, you said look the fiscal deficit number is sacrosanct and should not be compromised. A corporate tax cut has happened, But despite their admission, acknowledgment and communication that fiscal deficit will not be compromised, Moody’s says there is a problem in the economy. If rating agencies start taking a negative view, it automatically defeats the whole purpose of protecting the fiscal because then bond yields go higher and cost of capital does not go down?
I do not want to participate in echo chambers that start lashing out at rating agencies because they are not here to defend their actions. They have done their own analysis. I do not think rating agencies historically have got it completely right, but on various occasions, they probably have got it right too. My own assessment this time is they have got one set of assessment as static and it is kind of dated. I am not a great fan of taking that as a projection of things going on. What is important is in a time when there are event-wise discontinuities in the system, it means that a person whose rating has been downgraded, does not immediately get money, new paradigm in the Indian markets; Two, in the past you would say that HDFC as a AAA would borrow at a particular rate. Somebody with a AA plus would borrow at so and so rate. Even a BBB would get money at a different rate. That particular paradigm is breaking for the moment. Until it comes back, -- I do not think you can use empirical data.

What you can say is that liquidity finally is the panacea for this. One does not know in what manner or shape or form will liquidity trickle in. That is why we gave a very interesting thing; overseas equity in domestic debt is the marriage you need. No constitution has said no to this and this is what you need to make things happen. It can be seen when a private sector bank attracts a lot of money -- be it family office money, private investor money or fund money.

Our own particular private sector bank is where we are working on raising money, we see this is the kind of investors that are coming in because the world over, banks and financial services are the highest in terms of attracting capital. There is an investor who has actually come out and said treat me as dumb money. I just want the play. I do not need any conditions, I do not need any board seats, I do not need anything. I just need something in an RBI approved limit, 5%, if it is so be it.

So there are different kinds of investors coming in. The traditional PE investors typically come with due diligence and conditions etc. We are seeing a new category of investors coming.

How many offices are looking at investing in the bank? The Munjals and the Mittals are looking at putting money in Yes Bank?
Some of the finest Indian investors including family offices are looking at investing. Whether it is YES Bank or any other bank, without being specific, I am just talking about that the concept of new investors coming in from across the world into the Indian financial services.

This morning I read something about an NBFC getting money into a particular part of another NBFC. So one part is getting financing. It is overseas capital and domestic debt and if you take this theme forward, whether it is completion financing for real estate, all of these themes will play out.

Also Read

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