The co-founder of Ashmore Investments follows four principles while investing and these are: a focus on necessities over discretionary, market leadership, balance sheet and export potential. He says you can’t go wrong if you pick stocks following these mantras. It was almost like a graveyard feeling when markets fell in March but right now it feels like the carnival is back in the town. The problem with this carnival is that very few actually have the entry ticket and participation levels are low on the institutional side. Very few are convinced that these levels are sustainable?A massive amount of liquidity has come into the market and that is driving up stock prices. It is not different from what we are seeing elsewhere in the world. Central banks across the world have pushed money into the hands of people, households and a lot of that money has gone into the markets. For about two years, the Indian market was very tight on liquidity and now we have a significant amount of surplus liquidity in the system and some of it is percolating into the market. Like you correctly mentioned, the institutional participation has been relatively muted at least in the secondary market but the institutions have been participating in the primary market where there are new fundraisings via rights issue, QIPs and now the IPO market is starting to come back. It is not all gloom and doom. Slowly people are looking at opportunities and are starting to participate. Of course, there is an overarching fear that the economy is not doing well and there is a huge amount of retail participation and so is this the classic market top yet again. Where have you added, what have you subtracted, where have you taken some chips off the table in the last two or three months? At the end of March, we sat down and said that okay the economy is going to be in a tough spot, what do we do? We said that we are going to move our portfolio along four axes. First is the focus on necessities over discretionary, every product falls somewhere on that scale where on one extreme you might have complete discretionary demand -- like going to a carnival as you mentioned -- or at the other end, you would have a complete necessity demand like buying toothpaste and everything else is somewhere in the middle. So try and move as close to necessities as possible and keep the discretionary element low. Second, which I am beginning to realise is probably a bigger theme than even necessities over discretionary is leadership. Since the market is in a tough spot, because there are select people consuming and because banks want to lend very carefully, leadership is going to play a major role in winning market share. In times of trouble, you should move more towards leadership and get out of number three, number four market share players. So, that is something that we have done. The third is to focus on balance sheet quality. It is not that we were buying overleveraged companies earlier, but the focus on cash flows and balance sheet has become even more important. Lastly, focus on exports because the western economies might come out of this with fewer cuts and bruises than India will. So in a sense, the recovery in the markets in the western economies or recovery in the western economies is going to be a little bit earlier as compared to what we might see in India, which might be a deeper U or a L-shaped recovery. Can IT do what FMCG stocks have done in the last couple of years? Now because of the base effect and the new focus on digitisation, IT companies can well give a double digit return. Their PE multiples are low, dividend yields are strong, cash flows are strong and I can see so many parallels with FMCG stocks a couple of years ago. I agree with you. If you think about the four parameters that I pointed out a) spotlight, b) very strong balance sheet, c) leadership in their chosen area of expertise within the broader domain of IT; and last but not the least, a lot of the services that they provide have a lower discretionary element than we probably appreciate. So within the IT space, discretionary projects might be put on hold but providing mobility, providing work from home, providing additional layers of security, providing key business architecture are the things that should have been done yesterday. So people who have not done them, are rushing to get them done. So, yes IT services is in a good place. Now whether they give the kind of returns that consumer stocks gave over the last three years or not, I do not know. But I am favourably disposed towards IT services. This is a peculiar world. You have got a safe haven buying in gold. It is at a 9-year high. Silver is in a tizzy and equity markets are also holding up. Do you think the key is in the dollar index movement and where do you see it headed next?These are very difficult predictions to make. Our view has been that the US dollar should structurally weaken. It has been extremely strong for almost a decade now and with the kind of deficits that they are playing with and the kind of slower growth that we are anticipating, one should expect the dollar to weaken. Now the problem is what does the US dollar weaken against? Does it weaken against real assets which are gold as you pointed out or commodities or other real assets like the real estate sector? Or does it weaken against emerging market currencies? Unless convinced about the latter, I think the former sounds like a promising argument. However, if you look at what global strategists like Jan Dehn says, he expects the emerging market currencies to do much better than the US dollar for the simple reason that the external account or the fiscal account deficits that are being run in emerging markets are far lower than what we have seen in the western world. These economies are much better positioned today than they were at any point in time during the previous crisis in terms of the kind of imbalances that they were running with. So yes, there is a case for that but let us see how it plays out.In terms of the kind of performance you see going forward, is there a strong case building for some of the other EMs? How confident are you of India’s attractiveness and the overall scheme of things now going forward?Let me take a step back. There are different challenges for each individual market. Some markets are significantly driven by specific commodities. Some markets do have a problem on their fiscal side or problem on their external account side and India has its own set of problems. We are living in a world where you have to do a lot more analysis on each market and make up your mind where you stand. While what you point out is right and India is relatively expensive in the emerging space. We probably have a bigger fiscal deficit in the short run than many other emerging economies. I also think that very large domestic demand and a reasonably healthy banking sector are positives. Bulk of our NPL pains have been provided for in the last three or four years and that is what the June quarter results seem to be showing us. If the asset quality holds up, this could be an area of very big large positive surprise. Intuitively, one expects the NPL numbers to go up as we go later into the year, given how slowly demand is coming back. It is anybody’s guess that borrowers will have problems down the road. So that stress is not visible. Maybe it is liquidity that is helping, maybe it is the fact that domestic entrepreneurs are so used to lifting themselves up by the straps that they will find the resources and the ability to bounce back just as they did post DeMo and GST and this will cause some delays but in case of default will probably surprise the markets on the lower side. Let us see how that plays out. Within the EM framework, I am reasonably positive on India. There might be some better markets out there but I am an India specialist and I would not be able to comment much on those markets . You said the financial sector is looking healthy and this time we have not seen the concerns that we had earlier with respect to the health of the sector, But given the kind of period that we are going through and the question marks around NPAs and moratorium, do you see any kind of risk that needs to be factored in?If you zoom out and think about it, you should expect more credit losses. The question then arises where are those credit losses going to sit? Are they going to sit in NBFCs, are they going to sit in MFIs or are they going to sit largely in PSU banks which have been pushing a lot of the Mudra loans or are they going to sit in the large private sector banks that have focussed on credit quality over the last three or four years. So the case I would make here is that the private sector banks are probably in a much better position than the aggregate banking sector and I would also make a case that NBFCs which have parentage or rating that will allow them access to funds are probably in a good place. Those are the two areas where I feel reasonably confident that the asset quality problem will not blow out of proportion and will be reasonably managed and the financials will be able to muddle through it. Now inherent to this statement of mine is that I am assuming there is no second big wave of Covid-19 which leads to much longer and much deeper downturn than what we can imagine right now. The central government and local administration in many places have clearly said the economy needs to continue to operate and most administrations are no longer in favour of continued lockdowns, hoping that we can manage the health crisis without having to shutdown the economy and that is the assumption I am going with. What is your view on some of these modern platform companies in India whether it is an IndiaMart or MCX or India Energy Exchange, Bombay Stock Exchange? The world is migrating towards platforms. Reliance Jio which was a telecom company has become a digital service company; Amazon is getting its valuation because it is a platform company; Microsoft moved into Azure the Cloud platform and they got rerated. This is the megatrend in the world. In India, does it make sense to either buy an MCX or BSE or IndiaMart or India Energy Exchange?Well yes, some of these businesses have very enduring moats around them. It is not easy to be an exchange where the bulk of the volume of the commodity trades on your exchange and regulatorily you are required to trade on the exchange and these are virtual monopolies in some cases. Of course, IndiaMart is not a regulated monopoly, it is a monopoly because of how it has positioned itself. I do not want to comment on individual stocks per se as to what was good, what is not but I would say is that if there is leadership in a business, again going back to the four points that I mentioned. You have a good balance sheet and you think that the company is doing things that will continue to allow it to remain a market leader and therefore it can add products or services to the bouquet of products it sells that it already offers to its clients, then I think it is in good shape. I am a big believer that leaders will become much stronger when we come out of this crisis because they are the ones who have the balance sheet, they are the ones who have the customer connect and they are the ones who are winning all the market share and that applies to the names that you mentioned as much as it does to many other companies as well. The government is saying that they will not be in a lot of non strategic sectors and they want to retain one or two big companies in strategic sectors. That means a whole host of companies are likely to be divested. If this is the headline and if you read this headline as an investor, would you react to it? Would you like to hunt for something in that space?Yes, of course. I mean why not? Some of the government-run businesses or PSUs have fantastic franchises. They have great assets and they are reasonably well run. We suffer from the impression that PSU companies are slothful, lethargic or they misuse capital. While that might be true in some cases, in many cases it is not. In many cases, the businesses are extremely well run. Of course, their executives do not appear much in public and familiarity maybe less with the general investing public. But these are great businesses and they offer very good dividend yields. They also have great valuations and in the right hands, these assets could be worth a lot more from a market perception point of view. So assuming that the government does go through with this and manage to privatise BPCL to start with, there could be a huge amount of value unlocking that will come through in the PSUs.