investment: Why Maneesh Dangi is cautious on equities, bullish on bonds, and neutral on gold

What an inspiring name, Mosaic means collection of a lot of things?
Maneesh Dangi: Yes, collection of all sorts of different diverse elements, but if they can be put in coherently, although different, like in our family, all members are so different and yet there is a unity in it, that is mosaic. As diverse elements are coming together, we call it Mosaic Asset Management.

How is the firm going?
Maneesh Dangi: Good, good. Early days. We are launching the first one in October.

It is open to the public now.
Maneesh Dangi: Open to the public now.

So, what are you telling your clients now at this current juncture? It has been very easy if you bought gold, you made money; you bought equities, you have made money; fixed income has given great returns and even real estate has appreciated. If somebody is looking at generating superior returns, when everything is at an all-time high, how should one approach the market?
Maneesh Dangi: Basically, if everything has made money, you have to be cautious now. Our job is to figure out if something is wrong somewhere, so you would say that, as of right now, given that economies across the world, more specifically in the US, are slowing.

Also in India, there are some kinks. It is sort of fairly plausible that rates go further down. Rates in India could get to 5.5% or thereabouts, so there is still a runway there. I like that space. The bond yields in India will be sharply lower in the next one-two years, perhaps even lower than what we saw during COVID. Gold could be a small allocation. Again, I likes the fact that real yields in the US will come down, and therefore it has done really well already, so to that extent you should be cautious there. Because of gold, we have to be worried that it tends to get into these phases where for a long time it does not perform, so you never scale the allocation there. There is no coupon in gold, so be careful there. Equity is a space where there is a lot of momentum, and the margins remain high, both in the US and India. But the revenue has started to come off. Even for EBITDA and PAT in India, last quarter’s numbers were not that great. One has to be cautious. That remains my view.So, cautious on equities, bullish on bonds, and neutral on gold.
Maneesh Dangi: Very bullish on bonds. Neutral on gold. I am more of a macro top-down guy and I think it is reasonable to assume that even though India enters a slowdown, it is likely that Indian balance sheets are so clean, that the slowdown would not hurt them much. So, even though the pressure on P&L appears, margins will come down and disappoint equity markets. Balance sheets are squeaky clean and therefore they will be able to service the loans. If you can get great opportunities in lending, there is a decent risk premia to make. My sense is that for people who can afford and can move to high yield strategies, ours and many other such strategies exist, it is a better place to hide yourself. That is the way to play growth or extra risk premia versus equity right now.

A bond investor always looks at the balance sheet, while the equity investor always looks at P&L.
Maneesh Dangi: For a corporate bond investor, a high yield is most important. See if you are investing in AAA….

Which is what you are.
Maneesh Dangi: If you are investing in AAA government bonds, you are looking at inflation, that is your worry. If you are looking at credit, you are looking at survival and which is mostly balance sheet. The protection for a balance sheet, for Nikunj, me and any company comes from how strong our balance sheet is, how much leverage we have. So, a bond investor, as you said, is mostly a credit guy who looks at the balance sheet. Of course, equity also looks at the balance sheet, but predominantly driven by margins, P&L, growth in the profit and so on and so forth.

You are of the view that perhaps a base effect would kick in and slowdown will be there in FY25 and FY26. Slowdown does not mean you are not growing. So that is a great place to be in, for a bond investor because you are growing, which means there is no risk and when the slowdown happens, interest rates come down. Is that the thesis you are trying to share with us?
Maneesh Dangi: Yes, I am saying that it is not a 2008 crisis because leverage in the US is not so high. In India also, given that after all this growth, corporates have not levered. So, in a sense India also would not experience anything like what we saw post-IL&FS or post-2008.

So, even though we will slow down, household balance sheets are a bit levered now, global slowdown will affect us, but it would not mean that we collapse. So, in a sense, it is a little bit of a midway, a typical business cycle slowdown, but not a crisis, so that is my narrative. But then, it is likely that central bankers will have a lot of opportunities to cut rates. I would not be surprised if India cuts rates much more sharply. Right now markets are baking in a very light touch rate cut environment in India.

Even in the US, though it has aligned to what I thought five-six months ago, I still think we are going to be more like where we were in 2019, so somewhere at 2% or 1.5% in terms of Fed rate. So, markets right now are baking in 3.5%. There is still a lot of space for the rates to ease at margin versus what is being expected right now.

When equity markets are so strong, corporates may say why we have to go to the bond market. Everybody is doing a QIP or an IPO or raising money or even promoters are selling. So, will this entire premium which corporates were getting from the bond market because of the liquidity in the equity market, go down?
Maneesh Dangi: There are two things, one of course when you raise money in bonds, you get a tax shield. So, it is a tax deductible, it is an expense, whereas equity is not. So, to that extent, your reflex is always that if it is a money that you need for a shorter term, it is three, four, five years and profits will take care of whatever you require in any case over a long period of time, you do not want to raise money, so that is…, you do not raise money through equity, instead you do bond. But yes, you are absolutely right, at current valuations most corporates are encouraged to raise as much equity as they should.

I mean, look at Vodafone.
Maneesh Dangi: Yes.

They actually raised capital and they were able to take care of the entire debt obligation.
Maneesh Dangi: Yes, I mean, we cannot name names now, but almost bankrupt firms now, firms which have always languished, firms who have had patchy track records, all of them are able to raise money in equity. So, it is a wonderful time.

So, then what is the charm of investing in the bond market?
Maneesh Dangi: No, I am saying promoters must raise money in equity, that is very clear. Investors must not invest in equity in some of these dodgy firms, the firms with patchy track records. The charm of bond investing is that there are always opportunities which displace equity in a sense, say, if you want money only for three years and thereafter, of course, cash flows will be sufficient, why would you like to raise in perpetuity? Equity is forever diluting.

EPS ultimately gets impacted.
Maneesh Dangi: Yes. So, you would not like to dilute, which is why you would say that let us raise money at 15-16% for shorter tenure, for two-three years. So, this opportunity, good times, bad times will always exist.

You have done a lot of in-depth analysis of long-term cycles here. You are focusing this entire thesis on three pillars, nominal returns, real returns, and risk premium. What are nominal returns for equity shareholders in the last 10 years? And if history is any benchmark to go by, what should be the nominal returns in the next 10 years? First, what are nominal returns and what have been the nominal returns of the Sensex?
Maneesh Dangi: Nominal returns are the returns that you think and we all talk about, which is, let us say, if Sensex moves from 80,000 to 1,60,000, nominal returns are 100%, is it not? So, a lot of people tell us that the way to look at equity is about long-term investing. I looked at 10-year rolling returns of the last 30-40 years.

And what are rolling returns?
Maneesh Dangi: Rolling returns mean, let us say, if you invested in 2004 and exited in 2014, for 10 years you got some return. So, I am assuming that you are a very patient investor and stayed invested for 10 years. So, every time you put in money, every quarter of 1992, 1993, 1994, 1995, and then exit only after 10 years, so then you get a return of 20, 30, 40 years, right, on a rolling 10-year basis. Now if I do a median of that return, that kind of gives you an impression that, on average an investor who invested for 10 years, the returns are more like 11-12%.