Victory Margin, Not Election Results, To Shape Portfolio Allocation, Says Maneesh Dangi
If incumbents were to return on a strong foot, the fear that was seen last week would be undone, Dangi said.
The recent surge in market volatility could be mitigated if the incumbent government secures a decisive victory, according to Maneesh Dangi, founder of Macro Mosaic Investing and Research.
In an interview with NDTV Profit's Niraj Shah, Dangi highlighted the crucial role of the victory margin, emphasizing its significant influence on future policy decisions, no matter who takes charge next. He explained that the economic and industrial policies implemented by the current government will strongly shape upcoming policy directions.
In the alternate camps, the divergence in policy construct has never been as much as it is today for the last 30 years. Any risks there would induce extraordinary volatility, he said.
"If the incumbents secure a strong mandate, the recent fears in the market will likely dissipate," Dangi predicted. He suggested that while there may be some adjustments in policy, particularly in industrial and tax frameworks, the overall market conditions would normalize.
However, Dangi cautioned that if the incumbent government fails to secure the necessary margin, investors should consider a strategic reallocation. This could involve favoring property over real estate, FMCG over IT, or prioritizing non-infrastructure sectors over infrastructure. Additionally, he recommended a preference for the private sector over public sector undertakings.
Recovery In China And Foreign Flows
A long-term view would suggest that China would surprise more positively, according to Dangi. Purchasing Manager's Index prints for the emerging markets have been very strong, which is showing how positively China is performing, he said. "There are better ways to gauge China than the Chinese data alone."
If FIIs were to pivot back to China, it could come at a cost, Dangi said. If someone large, like China or the emerging market basket, gains, it is at our expense. "I would never celebrate China's retrieval of flows from the FPI pool."
Watch the full video here:
Edited Excerpts From The Interview:
What's your take on the happenings on the macro landscape and risk assets over the last three odd months? India has got this specific period of pre-election volatility which is evident, but the world is not bereft of volatility either?
Maneesh Dangi: I think for those three months, you could say there were two surprises to the markets.
One, of course, almost all three inflation prints in the US have been somewhat disappointing. We can discuss this in detail. They were not as bad as they appeared in the face of it. But yes, at least a disinflation in the US actually was not there. So, that was a big surprise to the market. That led to, of course, major backup in the US yields.
On the growth side, you know, the GDP number in the US was weak. But I don't really sort of give much credit to GDP. There are better ways to actually track—at least from a market standpoint—what growth is and it is decent. Until the last NFP (non-farm payroll) number, I think growth has been decent.
What is actually from a growth standpoint turned out to be somewhat of a surprise that I think China is now beginning to recover and it is sort of now that it starts to appear to me that pretty much the entire world industrial cycle as well as would you say even the consumer cycle actually will very likely bottom at some point in time.
So, even though I kind of believe that the US would slow but the rest of the world could have actually bottomed and I'm not talking about India here, because India is more adjacent to the US than China. So that's the second big thing.
Third, of course, what happened in the Middle East was a surprise. Again, I consider oil as an insider. So, oil got the Middle East ahead of when we got to know in the newspapers. And oil also, again, got to the extent that now we know that it's actually healing and at least the tensions would not lead to the kind of supply disruptions.
So, since you asked me about three months sort of, these are the three major surprises that come to my mind.
Over the past three months, so much has happened, leading to a recency bias. Many people took this year as one of rate cuts, considering last year's trends. However, the narrative seems to have changed a bit. In the US, consumer spending is robust and that may lead to inflation. Do risk assets get impacted disproportionately, if we do not see rate cuts this year, or is the market adapting to the possibility of rates staying unchanged?
Maneesh Dangi: It's certainly possible, if actually growth doesn't sort of slow down. Though in the election year it's very, very difficult that rates perk up from here or even stay here because it's pretty toxic.
While you argue about consumer, frankly, on high streets of Paris and New York, you'll never see a slowdown ever.
But there are sort of chinks there. You know, they are the small firms, where layoffs have happened. Of course last year, one-and-a-half year, you had the IT firms layoff and they're not sort of taking anyone back actually.
So in a sense, the labour market while very tight, but the cognitive labour if you could think of another top layer of the labour, top quartile of the labour, that market is pretty loose and sluggish, so to say.
So, I kind of think of things more from a cyclical standpoint. Given that the US had a very strong upcycle, the next move at some point in time would be—given these business cycles tend to be three or five-year boom bursts—and were seen in Asia, Europe, would play out at some point in time in the US.
So, my sense is that it is sort of more of a timing thing, yes. You know, even I was of the view that June, July, you know, you would begin to see unemployment numbers rise, NFP numbers should have worsened significantly. That hasn't happened.
Last year, the NFP numbers were bad. I was actually thinking that we'll get to 1 lakh or 1,25 lakh NFP numbers, but that did not happen. I think that maybe it’s sort of delayed but eventually the economic slowdown—because of high rates—would kick in and that would mean that eventually you will have rate cuts.
So, purely from the view point of a bond investor, I argue then that frankly, these three-month and six-month postponements do not matter. I guess there is excess risk premia built in bonds. Therefore, for a bond investor, it's still a time that he ties this risk.
Is growth bottoming out in China? According to a Morgan Stanley note today, China is growing, but with no material improvement in inventory levels and spreads, especially for steel and hence profitability?
Two, is that growth imperative for emerging market flows to start coming back, in a meaningful way? Will India benefit there?
What happens to commodity-linked stocks because there has been a bout of outperformance? Will that come back again?
Maneesh Dangi: So, the second question first. Emerging markets, of course, are more adjacent to China.
If you see, while last week’s global PMI prints also suggested that they have had a relapse of sorts, EM PMIs like that of India have sort of been very, very strong. So my sense is that, they too are experiencing what China is going through.
They are a better way to gauge China than Chinese data itself. My sense is that it's likely that China—after a good three, three-and-a-half years sort of purge—has bottomed out. If you look at retail sales in China, it's a pretty bad 2–3% growth. Historically, they were in the teens.
So in some sense, various parts of China are still struggling, but a lot of structural reforms pivot to something else relative to property and the estate. Large part of it, you know, is at a fag end and if I were to bet on a three-year, five-year, or 10-year view, relative to expectations, I think China would surprise more positively.
I was China pessimist, for long, until 2019-20, in terms of growth, but I think, consensus has shifted to left, and I guess China wouldn't do as badly. China's sort of technological advances may have actually surprised everyone, including me.
And also please understand that China has a degree of freedom that it can do Japan to its currency, and actually grow and stimulate itself. It can do what the US did in 2009, or 2020 to re-stimulate retail sales and consumers. It's not doing all of it.
So, there is a protracted recovery, but the degree of freedom with the policymakers sort of both at currency and rates levels stay there. So that’s on China.
On commodities, again, I kind of believe that most specifically copper, but generally metals are good insiders of what's happening in China and they're also telling you, from purely a price-action point of view of the last few months, that they know something that most probably stock market didn't know there and now even stock markets know that they have bottomed.
So, now, would copper rise or other metals will rise? It is a lot of things about valuation. But if you're trying to sort of gauge China, then you know, all of them are actually telling that yes, China must have bottomed out.
Many people believe that EMs as a basket, and even India, will benefit when China flows start, as opposed to thinking that flows moving away from China will move into India. What is your thought here?
Maneesh Dangi: The Indian flows are like TINA, in a sense. If let's say you can't go to Malaysia, China, which is within EMs is an alternative.
India always seems like an oasis. And if China would become attractive again, emerging markets, including China, become relatively cheaper compared to India. Even when you adjust for ROEs and stuff like that, its growth isn't as bad. So you kind of get similar businesses in China industries at much cheaper valuations.
So, if FIIs were to shift their focus back to China, it would come at a cost. In aggregate, actually flows don’t rise dramatically, outside of a small hedge fund flows. ... If someone very large like China and EM as a basket is gaining, it is gaining at our cost. So I would never celebrate China retrieving flows back from the FPI pool. It is not necessarily good news for India.
Maneesh, the pre-election period has witnessed some volatility in the stock market. There's talk about wealth creation by PSUs in the past couple of years, but naysayers argue that these stocks will never be completely autonomous. There will be interjections that may disrupt the party. What do you think?
Maneesh Dangi: I kind of think that what matters the most actually is not who the next ruler is. We sort of know it. It is most likely that the incumbent is returning.
What matters, of course, is whether the new economic policies differ significantly from the current ones, and at margin if the incumbent is losing somewhat. It's still winning, but still losing somewhat. It has a large influence on the policy construct of the future.
Now, we all have to admit that in the alternate camps in India, the divergence has never been as much as it is today for the last 30 years. The mandate that the opposition wants is to do things, which is so, so different from what is being practised in India in terms of ignoring policies and very likely in terms of industrial policies, that any risk there would induce extraordinary amounts of risk of all sides or volatility.
So, I think, given that now we are halfway done in poll season, at least in Mumbai, the assumption is that it is a no risk at all. It's actually now coming close to a point that okay, it could be some risk in some form, in the spectrum of possibility and therefore it's baking in.
That's how I think of the poll season. I don't think people still think that there is any major negative surprise in terms of who forms the government but they could be now shaken that what if it's not the kind of government that they thought they would get.
Some people don't tend to take advantage of the fear. Others believe that the fear has valid reasons due to the exaggerated optimism. Which camp are you on, or aren't you in either?
Maneesh Dangi: If the incumbent was to return, our last one week’s of sort of fear harvesting will be undone. If the incumbent was to sort of fall short of something like let's say, very lowish number 220, then you ought to play a major inflation and redistribution trade in India, which will mean favour property over real estate, favour FMCG over tech or other sort of growth sectors, favour non-infra versus infra, favour private versus PSU.
So, that sort of trade will return. At 250 plus or somewhere between 250 to 285 for BJP would mean, a small 5–10% of leverage there and you know, things are back to square one with a little bit of dilution in terms of the policy construct—especially the industrial and tax policy construct. So, that's how I would kind of think of it in terms of the reflections on the outcome of elections.
Post-Covid, rural has largely been hurting, while urban and premium sectors have been benefiting. Do you believe that at some point of time, the cycle would naturally undergo some bit of change? Can rural come back or is that difficult to pencil in right now?
Maneesh Dangi: It is very likely that if you were to take a one or two-year view, the term of trade adjustment both from a policy as well as growth standpoint would go in favour of hinterland and those proxies in businesses. One such is, of course, two-wheelers that is a stable business.
Many such would actually likely do better than the alternate, you know, which is urban proxy businesses. So, purely from a cyclical standpoint, it's far too long. One part of the economy has done really well at the cost of others I would say. I guess it would change.
Now if the question is if it is still there. No. You don't really hear from Unilevers and such likes, the volume growth is sort of pretty dismal. I think, one good news is that let's say MGNREGA jobs actually year-on-year are contracting now.
So that's sort of maybe telling you that there is some traction. It could very well be that the entire labour migration may have reversed and that may be a cause, because I'm not very happy with the real wage growth of rural India yet, especially in agriculture. So it's still mixed.
Again, as we talked about bonds, you know, if you're taking a two-year view, very likely these things tend to heal themselves or policy induces healing. So it's very likely that over the next two years, the other side of the “K” would likely do well.
If you're a three-month guy, you still don't have very strong data, but markets tend to look through this and because like half-life of that is already over, I think market margin would begin to price this and trade this.
