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The macros expert

"I think the future of the world is in debt, demographics and deflation," says Ritesh Jain, CIO, Tata Mutual Fund, in conversation with Aarati Krishnan

The macros expert

To get Ritesh Jain, Chief Investment Officer of Tata Mutual Fund all fired up in a conversation, you shouldn't ask him questions about the Sensex, the commission controversy or AUMs - the staple diet of industry bigwigs. But get him talking about macro subjects such as gold, helicopter money and deflation, and you can hear passion ringing in his voice.

So what better time to catch up with Ritesh Jain than when we're trying to figure out the Indian market's strange reaction to Brexit, I thought and requested a call. Ritesh was firing on all cylinders as soon I dialled in.

I ask him first about Brexit. In the past, global events like this have always had the Sensex contracting swine flu. But how come both the Sensex and the g-sec markets have been partying post Brexit?

TINA factor

Ritesh believes that its global central bank largesse at work. "Globally, the strange thing that has happened after Brexit is that all asset classes have been moving up in tandem. Equities are up, bonds are up, gold is up and the dollar is up. This is statistically inexplicable. This is happening because globally, central banks are not allowing the markets to function on their own. They are intervening. As a market participant, if I know somebody is watching my back, my risk tolerance goes up".

With so much easy money, the TINA factor is working in favour of India, he feels. "Brexit has been positive for capital flows into India because global investors don't like uncertainty. After Brexit, there's new uncertainty around the Eurozone and UK. There are many political right wing movements brewing across Europe. But the political situation in India is stable. So even with 6-7 per cent growth it is attractive to these investors, with no deflation and political stability."

Brave new world

But with the bellwether Nifty already at a PE of 23 times on a trailing basis, is he worried that Indian stocks are too hot for comfort? We are hearing a lot of mutterings about bubbles from market veterans.

Ritesh agrees that Indian stocks are not cheap, but reminds me that it is an abnormal world we live in. "If you compare India's current PE to its ten-year history you are certainly right. But you must factor in the global situation today. Don't forget that $13 trillion worth of investments across the world are now parked in negative interest yielding bonds. If I had said even two years ago that investors would bet on negative yielding bonds, you would have laughed."

But given that we are in this "brave new world" where even capital protection is a big deal, Ritesh explains, the return expectations of foreign investors who bet on India are quite low. So as long as global interest rates remain close to zero, India's PE multiple could remain high too.
He launches into an intricate explanation of how 'helicopter money' from central banks is turning everything topsy turvy. "A couple of years ago, investors like us used to worry about what will happen if the US Fed hikes rates. But today the US Fed is unable to hike its interest rates because of global cues. Think about the most powerful central bank in the world saying that they are helpless to raise rates in spite of their own economy doing well. This is history in the making! Amazing things are happening," says Ritesh with the excitement of a schoolboy discussing an IPL match.
It is hard not to get caught up in his excitement and I mentally zip along with him on a chat about the US, Saudi Arabia and Britain.
But realising that we have chatted on about this for 10 whole minutes, I reluctantly abandon our global travels, and drag us both back to India. So what does all this mean for the growth outlook for India, I ask. Is it rosy?

Problem child

Ritesh says that the problem child for India is not the government, but India Inc.
"India is one of the rare countries where corporate debt-to-GDP is higher than Government debt-to-GDP. Given this situation, corporate India is reluctant to invest in new projects. Given that you don't even have visibility one year down the line, who will invest in a project that will come on-stream five years later? Therefore it is the government which will have to take on heavier spending to drive growth. It will have to be consumption and public sector investment that drives GDP."
Ritesh also believes that for sentiment to improve, we need a little bit of inflation. "In a country like India, investors demand high returns from projects. For those returns, you need some inflation. But with WPI in negative territory, growth has plummeted."
He turns out to be a Rajan fan and says - "I think the ideal situation for India would be slightly higher inflation, but with positive real interest rates for savers. Here, I think what Dr Rajan was doing was perfectly right. He was trying to reduce inflation expectations so that money can move from physical to financial assets. Most policymakers in India focus mainly on investors and forget about the saver. But Rajan focussed on savers. I think it is important for his policies to be continued by the new Governor", he ends.

Triple D

Commodity stocks have rebounded after taking a nosedive. Is this a new bull phase in commodities? Ritesh thinks that this is just a rebound market within a bear market.
"I think the future of the world is in debt, demographics and deflation. There is too much debt with investors and governments. Demographics are shifting towards older people, away from consumption. And the slowdown is giving rise to deflation. With China, the biggest buyer of commodities in the world in a slowdown, I think the days of high commodity prices are over. Do not extrapolate the short and sharp movement in commodity prices in the last six months as a long-term trend", is his warning.
What does this signal for debt funds, I ask, as Ritesh has been a skilled debt fund manager and a bond guru for much of his career.

The party for duration funds is about to get over, feels Ritesh. "I think the downtrend in (Indian) interest rates is almost over. With the 10 year g-sec at 7.25 per cent, and banks seeing lower deposit flows at lower rates, there will be less scope for rate cuts. So the risk reward, over next six months will become unfavourable for long duration bonds. We think investors should stick to short term or dynamic bond funds", he says.

Are macros 'noise'?

Having listened to all this macro gyan, I decide to provoke Ritesh with a question that has been bothering me. Many equity fund managers say that to be a good investor, one needs to ignore the 'noise' from macro events like Brexit. They stick only to studying companies and their fundamentals and are successful too. So what does Ritesh, who lives and breathes macros, say to this?

I get the reply even before I finish the question. "If global developments don't matter, there is no reason for the Nifty to crack by 500 points on the day of Brexit, or to recover strongly when European markets opened. In an integrated world, companies which depend on global growth for their earnings will certainly be affected by global developments. Take recent IT results. There is nothing wrong with the company. The worry is about global developments impacting earnings". Take that!
Ritesh however, is kind to the bottom-up guys and believes what you need for successful investing is a blend of a top-down view with bottom-up company selection. "I have a beautiful combination of both at Tata Mutual. I have a top down view and my fund managers are all bottom up guys. You must not react in a knee jerk fashion to macro events. But the top down view is to be kept in your mind".

Being boss

I decide to Get Personal by asking about his career. Ritesh worked in the forex and treasury departments of banks before moving to fund management at Kotak, Canara Robeco and now Tata AMC. Now a CIO with a team of 25 people to oversee, Ritesh says he misses directly managing money.
Why? Can't he invest for Tata funds if he likes it?
No, because Ritesh believes in staying out of his teams' business. "If you have a competent team, you should not interfere. And if you have to succeed in life, you need people more competent than you to work for you. I define the CIO's job quite simply. If the fund managers are doing very well, you have to show them the risk they are taking. When they are not doing well, and this happens to everybody, you have to stand behind them. I have learnt this quite painfully in my investment career" he says.

Goodbye to volatility

I have noticed that Tata's equity and balanced funds have delivered a more consistent performance in the last three years. But does Tata Mutual Fund have a unique investment philosophy? What is it? ICICI Prudential is associated with Value investing and Franklin Templeton with Growth, so what is Tata AMC's investment style? Ritesh sounds a bit vexed with this question.
"We clearly follow Growth at a Reasonable Price (GARP) as our investment philosophy. In fixed income, the philosophy is SLR - safety, liquidity and returns in that order. We understand duration and are conservative on credit risk."

GARP overcrowded

But with most fund houses now professing GARP, isn't this an over-crowded strategy now? Ritesh frankly admits that while Growth stocks can still be found in today's market, the "ARP" part is very difficult. Hardly any good stocks are trading at reasonable prices.
"From 8300 levels onwards on the Nifty, we knew it will be tough to find stocks that fit the GARP mandate. We knew the tide will turn in favour of value. But just because 'value' stocks are moving for three months, we don't move into such stocks. We stay with our companies for long periods. We know there will be three months in every year when beaten down stocks will race, but we will not chase that momentum. You have to stay true to your philosophy", he says.
He thinks the recent rebound in 'value stocks' like PSU banks will reach its limits when these stocks go from being deep bargains to fair value. "After that, you have no choice but to look at the company's profit growth, isn't it?" he asks.

Gold: From fear to greed
With his 'brave new world' macro view, where is Ritesh putting his personal money? He gives me quite a surprising answer.
"I have always had higher allocation to precious metal related investments". Apart from that, he favours in tax-free bonds, a small portion in direct equities, and equity and fixed income investments in Tata schemes".
Why precious metals? Ritesh admits that he is currently a gold bull. "I think the correction in precious metals is over. You see, gold follows a 20 year cycle in which it typically corrects for 4-5 years. We have now seen gold correct for 4 years by upto 40 per cent from the top. In the 1970s, the last bull market, the correction was almost 50 per cent. After that, gold quadrupled. Gold in my view today is a fear trade. There is fear of what is happening around us, fear of central bank intervention, fear of easy money. But I reckon gold will eventually become a greed trade where lot of capital will rush in. There will be a parabolic rise and that is when the bull market will be over. That, in my view, is five years away."
Ritesh is betting on global mining stocks to make the most of this. "I believe that the money that is parked in negative yield bonds will first move into equities, when helicopter money is announced and then at later stage into precious metals", he says, warning that such a strategy may not be for everyone.

Leisure

Spending time with family, reading and playing squash are Ritesh's favourite unwinding activities. Canada is his favourite holiday spot.
I know he is voracious reader because I am on his mailing list, where I get a steady supply of complicated articles written by greats as Bill Gross and Jeff Gundlach.
Even in his free time, Ritesh admits to a fascination for financial thrillers. What are they, I ask, curiously. "There's this guy called Michael Thomas who wrote in the eighties. He made some brilliant predictions about the world in The Ropespinner Conspiracy. I also love Russell Napier on the Anatomy of the Bear which has lessons from all the big Wall Street crashes. Then, there's Traders, Guns and Money and the Age of Stagnation by Satyajit Das".
Fitness is a priority too and Ritesh runs half-marathons and plays squash. Squash is hardly a networking sport taken up by top honchos - like golf. So what made him take it up?
Ritesh laughs - "I started playing squash ten years ago. It is one of the most strenuous games one can play. It is an injury prone game. People want to play squash to be fit. But you have to be fit to play this game."
That could apply equally well to being a CIO too. If you want to play the game, you need to be fit. You need to be able to handle every bit of information that is thrown at you by the markets - be it macros, micros or anything in between. And devise a strategy to convert it into returns!
This interview first appeared in the September 2016 issue of Mutual Fund Insight.