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Mon, 11 Mar 2019 | The Economic Times
The Economic Times

Financials one of the best ways to play India story: Jonathan Schiessl, IIFL

Relative valuations have come down a little bit from the highs we saw a few months back, said Jonathan Schiessl, Fund Manager, IIFL. FIIs are definitely beginning to have a look again, he told ETNow.

After stark underperformance year to date, finally in the last one week, India has begun its outperformance and if I just look at the rest of the globe, we have managed to starkly outperform. Do you think it is valuation comfort or this is more of a pre-election rally which is playing out, given that the official date for elections got announced and it is next month? 

Absolutely. Yes, it is interesting to see India starting to outperform, as you know, last week was a pretty miserable week around the rest of the world. India seems to be quite defensive from that perspective, January was obviously a difficult month for India vis-à-vis other global markets. 

The global markets came into a bit of profit taking, India obviously outperformed. You are right, people perhaps are getting slightly more constructive that they are worrying perhaps a little bit less about what might happen or might not happen in the election. 

People are looking at India. Relative valuations have obviously come down a little bit from the highs we saw a few months back. FIIs are definitely beginning to have a look again. 

Are there particular themes that they are bullish on at a time like this, you know financials for example seems to be a space that is trending today. What kind of strategy do you feel FIIs are looking at the market with currently? 

Financials remains probably one of the best ways to play India certainly. When you are looking at India from outside, it is a huge sector. There are also a lot of different segments to that sector. There is a lot of different ways you can play it. 

Obviously, on the structural side, there is so much growth potential over the next few decades in those sectors. FIIs definitely are interested in that space. The industrials is another interesting one as well, perhaps not the smallcap so much. 

Certainly, some of the data in some of the industrial activities seems to be pointing towards some capex beginning to pick up. That sector looks quite interesting although you have to obviously counter that with the problems going on in real estate, which perhaps will keep the data fairly subdued for a while longer.

Why not smallcaps because each and every brokerage domestic one is now actually rooting for mid and smallcaps because there is the valuation comfort, they have had stark underperformance for almost an year now and within pockets one is finding that value plus valuation comfort and the great bottom up stories nonetheless?

I totally agree. We are certainly looking at and have been increasing some of those mid and small cap exposure. They are certainly looking at price action over the last week, two weeks it has been very interesting to see pretty much across the board. You have seen quite strong gains in a lot of the smaller segments of the market. 

I am not sure that is particularly driven by FII buying, most FII buying tends to play in the larger cap space historically and yes, you do have some FII managers who do play in the mid and small cap space, but they it is not that common.

Which sectors within small and midcaps do you find...

We have got a couple of pharmaceutical names in the portfolio, I am doing quite a bit of work on financial names at the moment, those are the sort of areas which are very interesting. But across the board, even in some of the consumer names, we have seen some derating stories. 

I guess the issue is liquidity and it is quite difficult to get back into these names without pushing the stock price up too much in the short term. You have to be very careful because obviously with the stock price falls that we have seen, a lot of liquidity has left the sector and those that have held on tend to want to hold on for longer term. It does not take much to push these stock prices up. 

There is still some caution and we have still got a few months to go before the election, we still are relatively uncertain global environment around us, there will probably be a bit of volatility from time to time where perhaps you will get entry points.

Let us talk about some of the other pockets as well, oil and gas seems to be one that is moving today and we have got RIL, ONGC as well as the oil marketing companies all seeing action. Are there any particular factors that you are tracking there or any particular stocks or would you be staying away from oil and gas at this point of time?

Yes, we do have some limited exposure to that space, we only have Coal India NSE -1.77 % in the energy space, which is actually having a pretty strong day today. The reason we are in that stock in the short term is it is more of a defensive play, some of these PSU stocks yes, you can find plenty of potentially better managed companies elsewhere. 

But they do have very quite good defensive characteristics for this phase of the market, strong balance sheet, high dividend yields, relatively under owned as well and they have all been underperforming for quite some time. So yes, we do own Coal India, we like the dividend yield in that. It is probably not a stock that will stand forever but certainly for this phase of the market we do quite like that. 

It is interesting that you briefly mentioned that there is interest in real estate. Most people that we have been speaking with say that instead of real estate what would be better perhaps is real estate ancillaries -- your paint companies, tiles etc. Your take. 

Real estate is an interesting sector. There is obviously pain going on across certain segments of the markets, it is one that we have been looking after sometime and have not got any direct exposure on the space, but it is certainly an interesting one. But as you said the stock prices are relatively expensive. 

I am not sure we are in a stage where broad based real estate recovery has taken off. Obviously there is pain in this space but certainly some of those second derivative names are in interesting place.

What about the auto space? 

Yes, it has been a difficult space as you got the mixture of the domestic and the global factors at play in that space because clearly globally autos coming off a very very high base over the last year-year and a half and the issues with potential trade issues going on particularly with the US. 

There is a massive transition going on in the auto sector anyway which we are seeing as we move away from petroleum base gradually towards more electric type cars. 

Just getting the balance right between getting an auto ancillary or a four wheeler play you know and try to work out how expose to both global and domestic sides. 

We have been tracking the index and cheering when we see momentum above 11,000 but going forward and I know we are entering a dicey time period over the next couple of months with elections around the corner, anything could really happen. But what is your overall sense in terms of direction for the index and the kind of upside you think is the reason to expect? 

So what drives an index? There are many different factors that drive stock indices, fundamentals, liquidity, there are whole bunch of other issues. Obviously it is not just the macro. Obviously, the macro is important. However, I think if I look at from my recent trips in India, from my recent discussions with other FII investors, I think there is quite a bit of cash sitting on the sidelines that has been waiting there, a little bit more cautious, worried about the elections. 

So definitely I get the feel that this recent rally has potential to suck some of that cash. Once we get the elections out of the way, India will be actually quite well positioned 

What are you making of Indian aviation? 

It is a fascinating sector, I mean most investors would, a lot of investors would approach the aviation sector with some caution. I think historically it has been a sector which has just (37:52) chewed up capital and the discipline of companies has been certainly questionable. 

Some of the Indian companies particularly the market leader you can perhaps argue that is a different story, that it is new model with low cost travel which has certainly changed investors perceptions. It is a fantastic medium to longer term story that is there is only one way that aviation demand is going to go and that is significantly north. 

It is one of those sectors where you see very low penetration rate of aviation. So medium- to longer-term story looks very good.