What is happening in the market? Why there are so many moving parts?
S Naren: Actually, on the eve of Diwali, we had to give an interview where we told people that equity is not bank FD because the problem is there was a period of time from 2020 to 24 where people have thought that equity market is bank FD, at least after this correction no longer do people think that equity risk is equal to bank FD risk. So, I think that is necessary. But the reality is that global funds are the main reasons for this correction. There have been two times they have sold, once in 2021-22 and the second time in the last 30 to 45 days.
And both of them they have sold for reasons which are international, I think strong dollar, they wanted to take the money back to the US, etc. So, it has got less to do with Indian macro fundamentals or something like that.
Because if you look at it smallcap or midcap have not corrected in India significantly mainly because they do not own it. So, the selling has been completely in largecaps, both in 2021-22 and now. So, I do not think there is anything big to worry about because subsequently at some point of time in the next one year, they will come back and buy because it is not that strong dollar is permanent. You have a situation where the US has high fiscal deficit, high current account deficit, so in that kind of a situation, you are not going to have dollar continuously only appreciating.
So, at a time when they start depreciating, you will see inflows and that time the inflows will again come into largecaps, so that is why we do not worry too much about it. But if you are a trader, you have to worry about it. But as an investor, you have to worry less about these kind of corrections that you have seen in the last two months.
When we spoke last, that was before Dussehra on the same forum, you were of the view that it is hard to get bullish on the market because of valuations. From there to now, there has been a 10% shave off in largecap stocks, a 15% shave off at least in midcap stocks and a 25% shave off in small and midcap stocks. Looking at the parts which you just mentioned, macro, interest rates, earnings, etc, etc. Are valuations still rich or are they looking reasonable?
S Naren: Valuations are still rich in midcap and smallcap. I do not think the smallcap index has fallen 25%, maybe some stocks have fallen 25%. Neither has the midcap index fallen 15% across the board, some midcap stocks have fallen 25-15%.
So, our view is that largecaps are more reasonable at this point of time compared to midcap and smallcap. Is the market mouthwatering and saying that you have to put a thumping the table buy at this point of time? The answer is no. But in our framework, when flows are very negative, you are supposed to be a bit positive and that is our framework and flows have been very negative from FIIs.
I do not think you have seen this kind of 10-12 billion, 15 billion dollars selling. We have seen it very few times. We have seen it in 2008. We have seen it in 2020. We have seen it now. So, I believe that itself is a reason to be a bit positive at this point of time and that is completely on the largecap side. But market valuations are not super attractive or something at this point of time, clearly not.
Then, I move to the second part which is this entire strength in dollar, Trump 2.0 trade. There are assumptions based on the last regime of Donald Trump that a Republican administration led by President-elect Donald Trump means higher tariffs, more trade wars, and more and more gravity of manufacturing or supply chain moving away from China.
Do you think market assumptions are right and one should place these changes in portfolio planning or investment planning for next four or five years because whatever US will do, will surely will have an impact on assets and supply chains.
S Naren: You know that on a continuing basis, Donald Trump is known to negotiate. He will keep negotiating and doing things in a way that involves trade wars, but at the same time, he will negotiate. So, broadly, if you ask me, you cannot ignore the fact that US has very high trade deficits and you cannot ignore the fact that US has high current account deficits. And in the first regime of Donald Trump, he had the benefit of zero interest rates to fund his fiscal deficit, that is no longer there. Let us accept that you are not going to go back to zero interest rates because inflation has set in in US. It is not going to go back to zero interest rates, so that is a problem that US is having when you have 100% global government debt to GDP and you no longer have 0% interest rates, you have a borrowing cost for all your government debt. And unlike India, they have not been used to high interest rates. So, they are going to suffer because of that count. So, everyone equates 2016 to 20 with Trump 2024 to 28.
I think 2024 to 28, the US economy has to be handled much more carefully because 2016 to 20 was very easy. You had a situation where the starting point, everything was very comfortable and if you had debt and if you are trying to finance it at 0%, it was too easy for Donald Trump in the first regime, but this time it is not going to be the same. So, people think that it will be very easy. It is not going to be easy. It is going to be a situation where the US has to live within its means more and that would mean yes, trade wars, but then somewhere they have to handle their fiscal deficit as well, otherwise interest rates can go out of control. US is not like UK. UK is a much weaker economy.
But you know what happened to UK for a few weeks, about a few years back. So, it is very important that US also has to handle its macro very carefully and that they will do it, I am sure eventually, because it is a very flexible economy. But they do not have the flexibility that they had in 2016.
So, all this is good for India in the medium term. The problem with India has only been that equity valuations have been very high and even after this correction, they are not mouthwatering, although largecaps are definitely more attractive than midcap and smallcap.
You are a top-down guy. So, there is another macro trade, which started three months ago and perhaps has ended before everybody started talking about it, the long live China trade. Is that trade over?
S Naren: From a contrarian point of view, I also like the trade, but it seems to be over so quickly. See, the challenge is China at the end of the day is not a democracy. In a democracy I learned from my Russia experience, that when you do not have a democracy there are challenges. Having said that, purely on valuations, China is really cheap. But do you understand the economy? The answer is no. But on valuations, they are cheap. Does it make sense to invest big money? Answer is no, because you do not know what is there and all that. But what we learned from 2012, 13, 14, if all your debt is domestic and if you have current account surplus which is the situation in China, there are a lot of flexibilities that China has. Overnight, you can do a lot of things. You are not dependent on the rest of the world to fund you. You have a current account surplus and a huge foreign exchange reserve, so you can do a lot of things. It is just that the Chinese government has decided that this is what we need to do and that is why they are continuing to do what they want to do.
Can they give a big consumption bazooka? They can, because they have the capability to do it. It is not that they are dependent on the rest of the world to fund them, so that is the kind of situation. But India is a much more stable economy. The debt part of the economy across the value chain is very comfortable. Corporate debt is comfortable. Government debt is comfortable. Household debt is going up, but very comfortable. So, I would say we are in a much better position from a macro point of view.