The main point which is in the mind of the market right now and that there will be either delayed cuts in the US or even Chetan Ahya of Morgan Stanley this morning has put out a note saying no rate cuts this year in India. So, the whole narrative around some rate cut in the second half of this year, seems to have been challenged and as a result, yields have rallied. What is your own hypothesis?
Rahul Singh: There are two factors at work in the market. One obviously is the rate cut and whether that gets delayed and by how much and whether we have a rate cut this year or not – those discussions have started again and this is not the first time that there is a flip-flop in terms of the consensus view on the rate cuts, so I am not entirely surprised.

That obviously has an impact on equity valuations although I must say that in India, the scenario as far as inflation rate matrix is much better and also despite the high rates, the entire last one, one-and-a-half years the impact on the demand for the rate sensitive sectors like real estate or autos did not really get impacted. I am not very sure if fundamentally there are no rate cuts this year in India, whether it is necessarily a bad news for the numbers, for the demand per se, because it did not destroy demand over the last one, one-and-a-half years, which was the fear that if the rates remain high and when the rate hikes happen, whether, real estate demand will slow down, but it has hardly slowed down; so that is number one.

I would think that it is not really a big issue for the fundamentals for the economy or for earnings growth. As far as the other factor concerning the markets in terms of valuation, so far India has had a perfect macro which is under-control or broadly-under-control inflation with the current account deficit, fiscal deficit, all trending downwards. Now, for the first time, there is a real threat that if the conflict in the Middle East escalates and if it results in higher crude prices than what we have got used to between $85 and $90, then that can disrupt a lot of mathematics for inflation, current account deficit and even fiscal deficit. That is a bigger worry rather than the rates per se in my view.

What are your thoughts on the way monsoon and markets and monsoon and economy correlation we have had. No matter how much this correlation is coming down, there is a large section of the economy which is directly dependent on monsoon. This time, of course, the estimate so far is that it is likely to be a good monsoon, but consumer stocks, FMCG in particular, have not gone anywhere for a very long time. Is there an investment case building?
Rahul Singh: So far, we are not seeing any green shoots of recovery. My own sense is that if the urban economy continues to outpace rural economy, because there are a lot of interlinkages in the way the economies work, sooner or later the rural economy will recover but not necessarily due to agricultural income or monsoons, but purely because of the amount of capex and construction activity which we are undergoing and which is likely to continue post elections.

My sense is that in the rural economy, there is agri income, there is non-agri income. The non-agri income will start to show signs of recovery in the second half. But as of now, to answer your question, there are no green shoots visible as on date.What are your thoughts on real estate space? That is one space your house is bullish on. The data speaks for itself, be it launch data, volume data and absorption data as well. Which phase of the cycle are we in as far as the real estate space is concerned?
Rahul Singh: Yes, that is a good question. We have gone past the mid-cycle. We are not in a late cycle. Typically, the signs of late cycle are that you will have investor demand, you will have price increases in the real estate sales of 10%, 15%, 20% within the space of six months. We are not seeing that barring one market which is the NCR market where there are early signs of price increases outpacing the affordability. But even there, the demand is keeping pace. Essentially our sense is that we are definitely past the mid-cycle. We are moving towards the late cycle. But as long as the genuine demand is there and the price increases are in the high single digit kind of range on a yearly basis, we can sustain this cycle for longer. What we might see is that the stage of the cycle really is also dependent on the micro market which we are looking at. The Bangalore market can be very different from NCR, which can be very different the from Mumbai market. But overall, if I were to give you one generic answer, the low-hanging fruits are gone. Clearly the sector is doing very well. There are big launches planned even in the next financial year.

Most of the real estate companies are guiding for anywhere between 10% and 20% pre-sales growth this year which should happen. The question is what happens post that and whether there are more launches planned at higher prices, whether there is investor demand which comes in at the later stage this year, those are the signs one would have to look at very carefully because that is when you typically peak out in terms of a real estate cycle.

The other space where you have very good exposure is the manufacturing theme, which I agree with. But does valuation become a bit of a challenge in some of the capital goods names and manufacturing related ancillaries or are you okay with buying slightly on the expensive side if the structural story is very strong and intact?
Rahul Singh: No, you are right, I think valuations are becoming a challenge for some of these themes of infrastructure, capital goods as well as manufacturing. At the same time, the sample size is very large in terms of the choice we get in terms of different sectors, different companies. We are still able to take our picks and build a portfolio which is not very expensive.

Just to give you a sense, if you look at our smallcap fund which has a large proportion of manufacturing sector in it, our portfolio PE is at 25% lower than the benchmark PE of smallcap. So, essentially, you have to be more patient and you have to hunt for those companies or stocks where the valuations are still reasonable. So far, it is a slow process and it has become more difficult as the time has gone by but it is not completely impossible at this stage.