Madhusudan Kela On Covid, Yield Scare, PSU And New-Age Businesses

Two factors are likely to contribute to a rise in inflation that could ultimately hurt markets, according to veteran fund manager and investment adviser Madhusudan Kela. Some of the world’s biggest economies are faring much better as they have managed to contain the pandemic because of lockdowns and a higher vaccination rate. And the system is flushed with liquidity.But that threat is still some time away, Kela, founder of MK Ventures, said in BloombergQuint’s special series Navigating Through Uncertainty. Before higher interest rates will hit global markets, the positive rub-off of an economic revival is going to play out in 2022, he said. “I don’t see that global markets are going to collapse.”Here’s what Kela said on the global economy, inflation, India and key themes:Will rising yields cause a market collapse?Globally, there is a positive tailwind for economic growth because of opening up and the base effect of 2020, according to Kela. Every government and every central bank would do their best to ensure that the revival is not disrupted and the asset price increase, something that is going to pull economies out of the dangers of recession, is not disrupted, he said.There could be a bit of reallocation from debt to equity if benchmark bond yields move up, but Kela doesn’t see markets collapsing due to yield movements.Will Indian markets correct due to Covid second wave?That phenomenon is already visible to some extent, Kela said. “If you look at the Indian market, it has been underperforming.”“Forget the broad indices, there has been a much deeper correction in a lot of stocks which are essentially linked to the economy and which have had a good run in the first quarter, between January and March,” he said.The outflow of more Rs 10,000 crore worth of foreign money in April is not in line with what is happening in other emerging markets as they are seeing inflows, he said.Whether the market falls more or if there will be a full lockdown, Kela said he “would not assign 0% probability to any of that because no one knows how this virus is going to mutate and what are the resources which India or the world has to combat mutations”.But he is hopeful of a solution now that the entire machinery of the government is behind the problem and the world has come to India’s rescue, he said. Kela, however, dismissed the notion that there will be a repeat of 2020 because the markets are now prepared, as are the medical facilities and corporations.Which businesses will do well in India?The bigger and well-managed companies will get bigger, a reason the valuations they are getting are justified, Kela said. Most of the large companies are gaining market share at the cost of smaller and unorganised players, he said.Kela is also bullish on public sector firms as he expects divestments to pick up since the government needs resources. He hopes that at least two to four state-owned companies including Bharat Petroleum Corp., Container Corp., Shipping Corp. and Air India are privatised this fiscal.“We studied the whole Margaret Thatcher era of the U.K. when the disinvestment actually happened. From 1978 to 1982, the GDP growth rate of the U.K. was negative. When the entire programme got unveiled for the next 10 years, there was a 5% plus growth. All these companies (that were privatised) include British Petroleum, British Airways. They got new shareholders and new management.”Kela said it’s very much possible that India can have her version of the Margaret Thatcher moment. Kela expects this to playout for the next five years, if India goes ahead with privatisation.There’s also “absolute disbelief” about a rebound in PSU banks but divestment will be a game-changer, according to Kela. These banks are still trading at 0.5-0.6 times even as they have provided for bad loans.They have made provisions worth Rs 11 lakh crore or roughly 10%-12% of the total advances. “They have done their neighbour’s provision too,” Kela said, underscoring the reason behind his optimism.How should investors approach new-age businesses?While new-age businesses are not cheap, they have compelling business models. But such companies will not make a lot of sense to a traditional investor like him who always want to buy cheap, he said.Kela, however, said that he has learnt in the last two years that what “is valuable, you have to pay that value for it”. Still, he doesn’t see the necessity of owning such businesses because, eventually, every investment has to make sense on valuation metrics, he said.He cited the example of Zoom which is trading at 30 times its revenue. Someone like him can never buy it even after knowing that it may make money, Kela said, advising investors to be very calibrated in their approach.

Madhusudan Kela On Covid, Yield Scare, PSU And New-Age Businesses

Madhusudan Kela says there’s still time before an imminent threat hits markets.

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