Nearly 70,000 investors from around the world attend the Berkshire Hathaway Annual Meeting, where Warren Buffett (previously, alongside his partner Charlie Munger) answers a wide range of questions from shareholders. This year, one attendee spotlighted India by asking Buffett about his thoughts on the country as it is poised to become the third-largest economy in the world. Rajeev Agrawal, a long-time attendee of the Berkshire Annual Meeting, is the fund manager and managing partner at DoorDarshi India Fund, a US-domiciled fund that invests in listed Indian equities. He speaks exclusively to Moneycontrol about his Berkshire experience, the Indian elections, and the risk-reward dynamics in the markets.
How was your Berkshire Annual Meeting experience this year?
The Berkshire Annual Meeting is a great way to connect with like-minded individuals. It is an annual ritual that re-emphasizes the timeless lessons taught by Warren Buffett and Charlie Munger: being a learning machine, staying curious, and being a good person if you want to befriend good people. I am a better person for having discovered Berkshire and its legion of fans.
What was your takeaway from Buffett’s answer on investing in India?
Buffett was quite optimistic about India. However, he doesn't have any specific edge in India. He has succeeded by finding an edge and continues to adhere to that principle. I fully expect that Greg and Ajit will be exploring Indian opportunities and will take advantage of them in the future.
What’s your sense of the attitude of US institutional investors and family offices towards India at this time?
A few years ago, when I would bring up investing in India, almost nobody was interested. These days, there is a growing interest in learning about India and its strong growth. More and more individuals and institutions are eager to participate in the Indian growth story.
How important are elections for markets?
Elections create uncertainty. Even though this time the result has been clear, it’s not over until it's over.
What if BJP gets around 270 seats – will the market be hit?
272 seats is good. It won’t change the functioning of the government, but sentiment will be impacted. It’s a risk to the markets.
How are you positioning?
We are positioning as if there will be a status quo. We also keep some dry powder in case there is a pullback.
Stack up the probability for us: markets moving 20% up versus 20% down post-election.
PM Modi has said there will be big bang reforms if they come back. Markets have already discounted high earnings growth. So even if that happens, it’s unlikely we will see a 20% plus rise in 2024. There’s less than a 25% probability of a 20% up move.
20% downside: If BJP gets fewer seats, the probability of which is around 25%. This is not entirely scientific.
Most likely return range for 2024?
Higher single digits to lower double digits.
Your takeaway from quarterly results?
The rural economy performing well is good news. Banks and autos are doing well, showing consistent performance. The PMI continues to be very strong for services and manufacturing. Although there has been a slowdown in government expenditure, companies are on track in terms of earnings growth.
Is it time for FMCG to make a comeback?
It’s hard to say. FMCG valuations are currently too stretched. High valuations are justified only by good return ratios and solid growth, and FMCG growth has been problematic. Unless there is a dramatic change in growth, these valuations cannot be justified.
Fed rate cut in September?
I don’t think so. I’m not sure inflation will start coming down soon. Housing and rent, which are big components of the CPI, are very sticky. My own house, which I have rented out, now has a market rent that is 10% higher. Rents are high because people wanting to buy houses are not finding inventory. Housing inventory is not available because mortgage rates are high now and people do not want to give up their existing houses tied to lower mortgage rates.
Why isn’t fresh inventory coming up?
Housing inventory is not available because mortgage rates are high now, and people do not want to give up their existing houses tied to lower mortgage rates.
What kind of data evidence will make the Fed consider a rate cut sooner?
The “data-driven decision-making” narrative allows the Fed a lot of flexibility and discretion. They have to be convinced that inflation is getting back to 2% or see some major signs of weakness in the economy.
Do you mean only after inflation lands at 2%?
The central bank has no incentive to cut rates. Their priority is inflation, and they would not want to fail on that goal, at least until the election. After that, it will depend on the political setup.
Why do you say they don’t have an incentive? You could argue exactly the other way!
If they cut rates, they won't receive any accolades because the economy is in good shape. But if they do cut rates and inflation resurges, they will face criticism.
Fiscal deficit is a bigger pain point. Even Buffett pointed it out…
The 6% plus fiscal deficit that the US is running makes it look like a developing economy. If you have so much money flowing into the economy, why wouldn’t it cause inflation? Almost a trillion dollars is going into interest expenses. The US is in a Catch-22 situation: because of inflation, you can’t lower rates, and because of higher rates, you have high inflation and a high fiscal deficit.
What’s next? Tax hikes?
Neither the Democrats nor the Republicans are focusing on the fiscal deficit. Even if they were, raising taxes is a big deal in the US. No one party controls Congress. Trump says if they come back, they will cut taxes. Biden, on the contrary, is saying he will introduce a tax on unrealized gains. These are political narratives, not legislative agendas or real risks.
What’s the prognosis for the market then?
Look at what veteran voices in the US are saying. Buffett is increasing cash. Jamie Dimon is saying the US is not on a soft landing path. Many have warned that things are not rosy. "Higher for longer" is a reality.
These are known risks markets are taking in their stride. Is that comforting or a worry?
It’s both comforting and a worry. Comforting because the market is aware of these risks and is pricing them in. Worrying because if these risks materialize, the market could react strongly.
What are the risks for India?
First is oil prices going out of hand. Second is a decline in Indian exports because if the US slows, IT services will be hit even more. Third is the new government’s policy. They have talked about big bang reforms. What if they get 400 seats and implement policies that are not favorable to markets? Not all reforms are necessarily good for the markets.
Apart from capital gains, what could qualify as a reform that is market-unfriendly?
There could be several. For instance, we have heard about a banking transaction tax. Can that disrupt markets? We don’t know. The narratives change very quickly in India, and that’s a significant risk.
Your favorite bets?
Banking and financials. The credit opportunity is big. Private capex is coming back. Multiple streams in the economy require credit – SMEs, individuals, infrastructure, especially power, etc. Banks will take the chunkier credit, and non-banks will cater to the smaller ones. We like Manappuram Finance, PFC, REC, IIF Finance, and IIFL Securities.
One thing you like about Indian companies
High promoter stake. It creates alignment and gives confidence. If you can’t believe in the management, there’s no point in investing in the company.
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