3 days ago
Devina Mehra, Founder, Chairperson, and MD of First Global, shed light on the persistent stress in India’s economy, particularly among lower-income groups. She stated that consumption growth has been slowing for years, with FY24 marking the lowest consumption-to-GDP ratio in 21 years.
Mehra also highlighted how falling real incomes, declining demand for entry-level cars, and rising unsecured credit are indicators of deep-seated financial strain in the broader ecosystem.
Edited transcript of the interview:
Q: I do not want to talk about microfinance and what stocks etc, will do, but just use that as an example to ask you whether it does show stress in the system, the consumer stress at the lower end. And how would you read it, what are the implications, not just for MFIs, per se, but for the broader ecosystem?
A: You talked about the stress at the kind of bottom-end of the market, and that is something which most people have discovered only after the market corrected. But this is something I have been speaking about for many quarters there has been a consumption slowdown, and that has not happened just in the last quarter. If you look at the last financial year, 2023-24, and you look at just the consumption number out of the GDP, that was the lowest it has been in 21 years. So, that was very much visible. Your GDP was essentially running on the single engine of government expenditure.
If you look a little broader term. There is a book called Lilliput Land by Rama Bijapurkar that shows how, for the bottom 60% of Indians, their real income has fallen from 2016 onwards. For them, the income minus even routine expenditure, I am not even talking medical or marriage or anything, is already negative. And if you parse it out into what you see in corporate, once again, if you see entry-level cars, the numbers have been dropping, so people have not been going up the income ladder. I sometimes see some talking heads on your channel, a few months ago, saying all of my friends are buying luxury homes, they are all buying luxury SUVs, and the economy is booming. But people like us are not the only people who are there in the economy. So yes, there is stress.
If you talk of credit in particular, I was a speaker at a business summit, and one of the things which were like a lightbulb moment for me was when KV Kamath said, I mean, these two stresses I had talked about separately and not put it together, that you think about all the losses in the F&O markets, and those are mostly made by individuals; I think the figure is something like ₹1.5 lakh crore or something like that. And Kamath said, just think about how they were financed. And almost all of them would have been financed through unsecured credit of this kind. So that's another direct market-related point that goes into credit. And many of the fintechs and all the smaller players have been going down the credit score. The credit score at which banks would not lend is where these guys come in. So, there are many stresses in the economy, but they have been there, as I said, for a while.
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Q: The thing is that I think the RBI has been quick to tell a lot of the lenders to go a little easy on things like unsecured, etc. They raised the alarm bells a good year in advance, almost I remember when the risk weights went up. So, hopefully, I guess that is the hope now that this is not going to spill over beyond microfinance. So, do you think this will be contained, and what are you doing in Financials? And let me throw in the whole insurance question as well because it seems that in Banca Channel (Bancassurance) in some format or the other, there will be some regulation on how much insurance sales can be pushed through banks. So, tell us more about financials, both on microfinance institution (MFI) stress, whether you think it will be contained or not, in what on insurance?
A: Banks, we are underweight as usual. I would say the only time we were market weight to slightly overweight was 2022 which was the only year in the last five years that the Bank Nifty has outperformed the Nifty. Right now, if you just look at it technically, the banks might do better, but these medium to long-term concerns are what give me sleepless nights if I invest a lot in that sector.
As I always say, the problem with the banks and all lenders is that you only get negative surprises. It is not as if the borrowers do very well; they will get some super-normal profits, but if there is a problem, there is a hit. So that is the concern always with banks and lenders. So that is why I am, as somebody was saying that you repeated in every interview of yours that I am a nervous investor in banks and lenders, very few times that I am comfortable being there. And a banker was recently telling me, I have not studied that myself, that gold loans have been going up. And he said that is another source of indicator of stress in the system because jewellery is the last thing people mortgage to get money.
In insurance, yes there have been a lot of changes being announced. We are still studying it, and it is not a sector we have a big exposure to, so we did not need to react immediately.
Q: Beyond the banks, and you have articulated the concerns over there. Financials elsewhere, and you are saying in insurance you do not have an exposure. But capital markets have been doing well. People seem to be gung-ho on the wealth management business as well. Just trying to get the overall picture on financials, even the non-lenders. If there is anything that you have bought in this recent correction or anything that you like?
A: We have not bought much. We used to hold a number of capital market-related stocks earlier, so stock exchanges and players in the market and AMCs, for that matter. But in our July rebalance, our system stopped liking them, or rather, you can say that we liked other things much better. So, we actually exited most of them in a few months.
Q: Let us talk about the consumption theme, staples as well as discretionary. You have some allocation, 13-14% of the total portfolio. Could you tell us, as of now, where is the preference?
A: I will tell you overall which sectors because this is a very broad level classification. For example, autos go into consumption and so on. So, let me tell you where, in terms of the sectors that you and I understand, we are overweight.
So, we would be overweight in pharma and healthcare, and that would be probably our biggest overweight in terms of just the percentages beyond where the benchmark is. In IT, we would be overweight now. Auto components, we continue to be overweight.
Where we have added, and I am not sure whether we are overweight or not, in the last couple of rebalances has been chemicals, which after 2022 we were mostly out of and then our systems have started liking them again. Of course, chemical is a very broad sector, so there are winners and losers depending on where the change you are, but that is one sector where we would have added. FMCG, we have also added some; we had a very low allocation, and we added in the last two rebalances, but not so much of the very large companies.
Q: The other thing, of course, which you track closely is global markets and global macro, etc. Now, Donald Trump has put together his economic team. They all seem like they dislike China. No particular views about India in that sense, which is, I guess, the silver lining and good news. But for the market here, is it going to be a little tricky. It's a minority view, but I remember Christopher Wood of Jefferies saying that. Trump is inherently, he is transactional, and, of course, he is unpredictable. So, we don't know. How should one view this from an overall perspective as we head into 2025?
A: I wrote a whole article on November 28 on this that the only thing you can say for sure with the Trump Sarkar coming in is that the uncertainty has gone up because the number of things he said during the election campaign is inherently contradictory. For example, he said that in the US, an average worker's income has not kept pace with inflation, and there has been a loss of purchasing power.
Now, if you put a 60% tariff on China, you put tariffs on everything from Mexico and Canada as well. So, for good measure, he said that as well. So that means everything on the supermarket shelves, the prices go through the roof, and inflation goes through the roof. So, that is not the one contradiction. Defence stocks, for example, went up with his reelection, but he has also said why the US should spend on these overseas wars.
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So, there have been so many things which are at loggerheads with each other. For example, if you cut government expenditure drastically, government expenditure is 36-37% of US GDP, so that would be deeply recessionary. He said the US dollar should not be so strong for exports to help, but a lot of measures he is talking about would strengthen the US dollar and add uncertainty to the mix his main adviser is Elon Musk. So, he wanted to compound uncertainty. So, you have a dream team there.
So very difficult to predict even what he will do. What he does has an implication on inflation, on what the Fed does, on interest rates, and the third order effect is on markets, the fourth order effect is on international markets, and then you have geopolitics, where you don't know what he will do, how the other players would respond. So, it’s just infinite combinations, if you go into game theory as to what would happen. But I do not think there are a lot of direct things which will impact India. I doubt it unless he does something which impacts IT services or something, so that may be the only possible risk area which directly impacts India. So, the rest of it will have to wait and watch at least what he does before one can predict what will happen.
Inflation already is a little bit higher in the last print that came last week, so that leaves, again, a little less headroom for the US Federal Reserve to cut rates.
