santa rally: India earnings growth to be in high teens; Santa Rally is coming, says Mark Matthews

What gives you the idea that Santa this year will not disappoint?
Well, as I said, specifically the Santa rally is from the 25th of December to the end of the year, so that is only five or six days and who knows if that will happen or not? But I do think that the market should go up and there are several reasons. The first is that the economy in the US will slow next year but not enough to be in a recession. We are looking for around 1% GDP growth next year, which is extremely low, obviously, but it is not zero and you still have a lot of growth coming from these big technology stocks and earnings and I think that will continue because of the investments they are making in their cloud computing businesses with generative AI and that will be incredibly accretive not only for their revenues but for the entire S&P over the next few years.
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So, those are the two main things – we are going to have the economy decelerate but not enough to be in a recession but enough that the Federal Reserve will be more relaxed about inflation and interest rates and then number two, still very strong structural growth in technology through the generative AI story.You talked about S&P, you talking about technology, i.e., Nasdaq as well. But for a bit of a long term, let us say in the next three to five years, would you prefer Indian markets over the US markets or continue to be overweight US versus India?
My best guess is they will do about the same. But I do feel that the United States is the best market to invest in equities and by the way, in bonds, and there are many reasons for that which have nothing to do with GDP growth, because the United States being a mature economy, the GDP growth is relatively low but we should have figured out by looking at China that there is not really a correlation between GDP growth and stock market performance.

In America, what it comes down to is simply that the technology sector is the largest sector in their stock market and it has returns on equity in the mid-20s, sometimes even in the 30s. It is an incredibly profitable sector and they just have the ability to invent and create great new things. So with generative AI, we are on the cusp of that all over again. I was just thinking this morning how back in the 90s, I did not know anybody who was working in the technology sector apart from a cousin who worked at IBM and now I have many friends in the technology sector and the reason is because of those “magnificent seven”. They did not even exist back in the 90s and with generative AI, we are on the cusp of a whole bunch of new technology companies. They probably do not even exist right now, but they will over the next 10-20 years. They will rise and become big and that is something that you really see only in the United States.

What is the outlook when it comes to the earnings growth potential as well for India? What is it that you are forecasting versus the rest of the world?
Above average, so in the high teens, potentially low 20s and you are right that it is good. I was just talking about the United States but absolutely the appeal of India is the earnings growth and that is being driven in part by the strong economy but also the resilience of the banking sector after years and years of taking that painful medicine of writing down the non-performing assets is now in a place to lend. We have got a capex cycle, that is undeniable and it will continue and the banks are the biggest sector in the Nifty.

Now, the biggest moving part in the last 12-18 months has been how long interest rates will move higher and when will they hit a roof? Assuming that interest rates are not a moving variable for 2024 but elections are or will be both for India and for the United States, two largest democracies would be voting. What kind of volatility do you think it will create?
I have to politely disagree with the way you have asked the question because I do not think that politics are a defining factor of the market. They never really have been. You might remember in the lead up to the 2016 election, people were terrified of Donald Trump. Well, we ended up having great stock market performance during most of his administration. It was not really until the very tail end when the pandemic came along and that was not his fault.I really do not think it matters that much who wins the US presidential election and in India, I do not think there is going to be actually much chance of the opposition coming in. I prefer to focus on the earnings growth in both places and in both places, it will be good. I mentioned India will be in the high teens, but we are probably looking at low teens. I will just put out a low number of 11% earnings growth in the United States next year and the year after. It is hard to see the market go down, if you have got double digit earnings growth.

Banking is one space that you are looking at positively, but how else are you playing the India theme? Is consumption something which is on the anvil? Real estate has been doing well. Have you been dabbling into any of those names?
Yes, very much so. Real estate, we would play through building materials which also benefit from the infrastructure spend. The consumer is definitely a good story in India which would benefit from the rising GDP per capita. Ernst & Young think that GDP per capita which is about $2,600 today will be $3,700 by the end of this decade. We would like to play that through the automotive sector and then we like pharma because it looks like the pricing pressure in US generics is coming to an end.

So, there are several other things. But to go back to what I said originally, the banks are a good way to play the fact that you have a capex cycle after many years when the corporate sector really was starved of capital because it could not get loans and now it can. So, to me, it just looks like a no-brainer.

There is an important point which you have said that this is part of your core philosophy. It is fun to listen to the market but do not let that influence your investment. Buy good quality companies when there is a fair price and buy more if they fall more. What is the market chatter you are ignoring and what is a good quality company on your radar?
Well, first and foremost, the politics. You can ignore it and I will give you a classic example, as gruesome as it is and unfortunate as it is what is happening in Israel which is not impacting the market. Look at the oil price. It is back in the low 70s now and so I just think that what you want to invest in is good quality companies. They exist everywhere in the world, by the way.

But they seem to be more prevalent in the United States than anywhere else in the world and I think the reason for that is because the middle class in the US is highly invested in the equity market and it insists on good corporate governance and shareholder returns and if you do not get that, they will change the board, they will change the management. Also, in the United States, the way the S&P 500 index is created, obviously it is a weighted index and so it naturally pushes the best companies right to the top.

The worst companies get pushed right out of it and there are a whole bunch of companies in the middle that get acquired. So, actually the average lifetime spent on the S&P of a company is only 12 years now, that is down from 60 years back in 1950 and the reason is because the M&A is so strong there.

I could name a whole bunch of other reasons but that is what all you need to do is buy the good quality companies and hold them and now the thing is that companies do change over time. I mentioned IBM earlier, when I said my cousin worked there. IBM was the great stock back around 1965 and today it is obviously not nearly what it was. You have to be nimble but in a way the S&P 500 index does that for you because it is constantly changing the companies.

Is there something you have read recently that has caught your attention or made you think a little bit more?
Well, just because I mentioned the 1960s and IBM, there is a book, I did not read it recently but a book I like called The Go-Go Years by a fellow named John Brooks and he was a financial journalist, a little bit like the Michael Lewis of the 1960s. Just to preface it, The Go-Go Years, we all know the mean stocks a couple of years ago and those all tanked, did not they? They went down about 80%. We all remember the dot-com collapse and stocks also went down about 80% of the Nasdaq.

So, The Go-Go Years were a very similar technology-driven bull market in the late 1960s and a few dozen stocks. IBM was one of them that everybody was enraptured with back then. They went down over 80% in the early 1970s and it was interesting to read that book, apart from the fact that John Brooks is a fabulous writer and it is highly amusing to read. But you just realise that this trend of technology-driven bull markets happens over and over again in the United States. I suppose I am contradicting what I said earlier about the great thing in the S&P is technology, but I think that it is great because the S&P is an index that pushes the best companies to the top and then pushes the worst companies right out of the index, so that you do not get stuck with a bunch of deadwood.