“When the economic cycle begins and the money market is flush with liquidity, the gap in funding cost between strong banks and weak banks isn’t as high as it should be. What happened (rate hike) is terrific for high-quality lenders,” Mukherjea of Marcellus Investment Managers told investors in a webinar.
He said lenders like
, Mahindra Bank, Bajaj Finance and have very strong liability franchises and as liquidity tightens, weaker lenders in India will have a disproportionate jump in their cost of funding.
In such a scenario, he said the men and the boys separate and it becomes easier to discern who is the real ‘baahubali’. “That’s why we are hoping that Shaktikanta Das tightens liquidity super fast over the next six months so that the weak lenders cry.”
Although India’s largest private sector lender HDFC Bank has delivered a negative return of 7 per cent in the last one year, it has consistently gained market share on both sides of the balance sheet. “Advances (loan book) market share has shot up from 7% as of Mar’17 to 11.5% as of Mar’22. Similarly, deposits market share has improved from 6% as of Mar’17 to 9.5% as of Mar’22. No other bank has been able to clock market share gains of this magnitude organically over the past five years,” Marcellus said in a note to investors.
Mukherjea, who is known for his strategy of picking high-quality stocks that are likely to compound consistently and then sitting on them through thick and thin for long periods, said rising rate cycles are actually good for his portfolio stocks.
In the last 70 years, the US Federal Reserve has hiked rates 12 times. The money manager, who handles assets worth over Rs 11,000 crore, says out of these 12 rate hike cycles, 11 of them led to bull markets.
“There have been two rate hike cycles in this century by the Fed. From 2004 to 2006, the S&P 500 rose 50 per cent and the Indian stock market doubled. From 2015 to 2017 when the Fed again hiked by around two and a half per cent and again the S&P 500 rose by around 50 per cent. This century, India has been through three rate hike cycles and all of them have been accompanied by rising markets. So whether it’s in America or in India, rising interest rates typically tend to be accompanied by rising markets and not by falling markets,” he said.
The fund manager, who has written books like ‘Coffee Can Investing’, ‘Diamonds in the Dust’,
, said, as rate hike cycles tend to be accompanied by strong GDP growth, you get pretty punchy bull markets when the Federal Reserve or the RBI hikes rates. “So there’s no great mystery there,” he said.
Pointing out the data of the last 22 years, he said when the CPI inflation is high, companies with strong pricing power do better. “When CPI inflation is above 6 per cent, our type of companies tend to outperform the Nifty on topline growth. They’re basically passing on the input cost inflation better than a weaker company,” Mukherjea said.