In most interviews that we do, we get an insight into what is happening in the markets. Rare is the interview where we come across simple, distilled, timeless wisdom. This is one of them. Here, Ajit Dayal, chairman, Quantum Mutual Fund, dwells on a wide range of market and economy-related subjects. Two points emerge very strongly. One, he says, if you shut out the day-to-day noise regarding what is happening in the markets and instead focus on a stock’s long-term fundamentals, it lends clarity to your investment approach. The second point that Dayal makes is that those in business must be guided by a strong moral compass. He advocates not paying bribes, fighting corruption, and highlighting the racketeering that is going on within one’s industry — even if its means paying a price. His views come like a gust of fresh air in this scam-tainted world that we live in. Read and savour them. This interview was conducted by Sanjay Kumar Singh and Anindya Bera.
There is a debate going on regarding whether the Indian economy is headed for a hard landing or a soft patch. What are your views on this subject?
The Indian economy will grow at between 6.5 per cent and 7 per cent per annum, on average, for the next decade. Between 1980 and 2010, the Indian economy has grown at an average rate of growth of 6.3 per cent per annum. Since we focus on the long run, we are not part of this hard-landing or soft-landing debate. I think India’s GDP growth will be pretty solid with maybe 5.5 per cent in a bad year and 8 per cent in a good year.
Do you see the slowdown in government and corporate capex as a big problem? Or do you see a recovery in the near future?
Well, I think this capex slowdown is led by the inability of corporate India to identify who to bribe to get their work done! We all know the scrutiny that has started ranging from Adarsh, to CWG, to 2G. So, the taker of the bribe is scared as is the giver of the bribe. Most Indian businessmen — small, medium, or large scale — complain that they cannot get anything done unless they bribe. That is their defence. Have they ever thought of not giving a bribe and living with the consequences? Of trying to fight the existing system? But they point out that the reality is if they don’t bribe, then someone else will — which may be true. It still does not make it right. The argument is the same as those offered by people who work for large financial firms profiled so brilliantly in the film, “The Inside Job”. Making this film available to investors is the best thing that SEBI and RBI could do to educate investors. The herd of MBAs claim that if they do not take the jobs offered by financial firms that have been built to fleece their clients, then someone else will. We live in a world of immorality. And we go about getting rich and aiming to be in some ranking list of the wealthy in India. Or some ranking list of the largest mutual funds in India. I don’t have a prescription for how to get mega rich without bribing. But I do have a suggestion for those who don’t want to bribe or be part of an opaque system — just stop paying the bribe and try to change the system by highlighting the racketeering in your industry. We have done that in the mutual fund industry — we are still small, but we are happy doing the right thing.
Does consumption still remain robust or is it beginning to slow down also?
Salaries in India are growing at over 15 per cent so the income earning power and power to consume is still there. But it is true that higher prices eat away the incomes of the lower middle class. So, the upper middle class, who spend much of their money on non-food items, will still consume. The lower middle class, who spend a larger proportion of their income on food and other basics, could consume less. They may shift down the quality curve for certain items like, say, shampoos.
Do you see any movement on the policy front which could possibly improve sentiments within the markets?
I think a quick punishment of those who are corrupt and under trial will send a great message. The 2G spectrum, the coal mines, and the hydrocarbon assets belong to the country. If there has been any swindle in the sale of these assets, then confiscation, fines, and jail terms need to be handed out. I think that will send a great message to the people. It may set off a chain of protest letters from the captains of industry, but we should recognise that many have a vested interest in the existing system. Not a single so-called business leader had the guts to write a letter to the Prime Minister when Mr. Bhave of SEBI was not granted an extension of his chairmanship. Here was a man trying to change the ethical framework of the financial services industry and where were the so-called captains? Well, they were ensuring that their rich ships were not at risk of hitting an integrity iceberg. They are so used to navigating in murky waters that any chance of a clean-up is a threat to them. Again, there are a few decent people running businesses — please don’t get me wrong. But they are a silent minority. And their silence is troubling.
How do you see foreign institutional investors (FIIs) behaving in the second half of the year? What will it take to bring about greater FII inflows into India?
The intrinsic value of an Indian company is the function of the earnings power of a company that will be driven largely by what happens in the domestic economy. But the share price of that Indian company will be a function of whether FIIs are buyers or sellers. So, the scenario I have in the global environment is that there will be a financial disaster. FIIs will sell, Indian stocks will crack, and then there will be a few months of watching the Indian economic and corporate data. The data will be good. FIIs will head back to India and share prices will rebound sharply — a pattern similar to what happened between October 2008 and March 2009. What I don’t know is when this financial disaster will occur. It could be today, next week, next month, or next year. Investors have to position themselves for massive uncertainty, not by selling shares but by ensuring that they have a good mix of shares, fixed deposits with nationalised banks, liquid cash, and gold. The proportion of these assets is a very individual choice, but personally I prefer something like keeping 18 months of basic living expenses in a mix of liquid cash and fixed deposits of nationalised banks, and the balance in some 80/20 or 90/10 mix between shares and gold. And if you are older and retired maybe you may want to keep more in fixed deposits and less in shares. But this mix needs to be thought out carefully based on your individual needs.
You have been critical of the quantitative easing programme that the US adopted to get over the crisis. What would your prescription have been?
The US government rescued Fannie Mae, the largest owner of home loans in USA, but made sure that its shareholders got wiped out. It nationalised the company. But the treatment of Citibank, Goldman, Morgan, and Merrill was different. There was a sponsored rescue either by the government or by a stronger institution, but the shareholders were not wiped out down to zero. These were all failed institutions just as Fannie Mae — the mortgage underwriter — was. Yet, the government used taxpayer money to rescue them and did not own 100 per cent of them. The rationale was that if the government took them over, the talented geniuses would leave these companies and only they knew what they had done! What a racket! These geniuses blow up their firms, the wealth of their clients, the global financial system — and then they claim that their superior IQ is needed to rescue the world and we cannot live without them. History will record this event as the boldest, brashest, and most successful daylight robbery ever conceived in the history of mankind. Please do see the film “The Inside Job”. In July 2009, I was giving a talk at a conference in Vancouver, Canada. And I was asked the question: how can I recommend investing in a country like India, which has huge corruption? I responded that corruption was a huge problem and that India was trying to resolve it with efforts like the Right to Information (RTI) Act and by using more technology for transactions. I then proceeded to ask the gentleman, an American, how he could ever invest in a country where Wall Street seemed to run the government as these bailouts suggested. There were 1,000 mostly Americans in the room — and many clapped. The prescription for a more humble world of finance is the forced break-up of large companies, a global freeze on salaries for everyone in the field of finance, and the ability to shut down the crooks and never let them enter this field again. But the chances of this happening are close to zero. So, investors need to be prepared for more crises and they need to protect their wallets — the financial geniuses are eyeing it all the time.
How damaging has quantitative easing been for the global economy, and for India in particular?
There has been no impact on India, as such, barring some rise in commodity prices probably due to a survival of risk-taking hedge funds. For the global economy, there has been an illusion of a return to wealth. This is largely driven by the US consumer still consuming and China still willing to hold on to US debt. The US has got more real goods in the past three years and China has received more IOUs from the US government in exchange. The fact is that the US needs to consume less and save more. And China has US dollar debt that is at risk of being equivalent to the value of toilet paper. So, India will also be affected because we own US government debt — but we own less of it. And the RBI has been buying gold. The RBI should buy more gold.
Coming to the Euro zone, Greece is not the only country facing default. The list is getting longer each day. Is there any solution to the Euro zone sovereign debt problem in sight or will it plague the region for a long time to come? Will France and Germany succeed in keeping the Euro zone together for long? The Euro currency may survive but not in its present form. Some of the euro countries may have to resort to their own currencies. Greece could head back to the drachma; Spain to pesetas; Italy to lira. Currency unions are plausible when all the economies within that union follow the same fiscal and monetary policies, when they all march to the beat of the same drum. Bonds issued by all these countries were for years trading as if they were all the same risk — note this as another example of a high-volume market with a totally wrong price! The European banks have large exposure to these troubled countries. They will need to be rescued as there will be a rescheduling of debt and a haircut for the holders of Greek debt. This write down of NPA (non-performing assets) will require banks to have more capital. Hence, the need for these banks to be rescued.
Which are the sectors that you are bullish on at this point of time?
Well, the team at Quantum Long Term Equity Fund are bottom-up stock pickers. I have given you all these macro views but that is not how they pick the stocks we invest in. We are not top-down investors; we focus more on the management and its ability to withstand tough environments, including a Lehman-like bust. We ask ourselves the basic question: will HDFC survive a globally tough environment or ICICI Bank, or both? Will Lever survive tough times or Godrej, or both? And what is the valuation of the stock at this point in time?
To read the first part of this interview click here
This interview appeared in the August 2011 issue of Wealth Insight. Click here to subscribe to Wealth Insight.