It seems like Trump will definitely win the US elections. So, how do you see that impacting the Indian markets? Which sectors could benefit out of this? Which sectors stand to lose the most because of this change in US presidential candidate?
Vinod Karki: This will be some kind of change some kind of direction in the market, I guess because if you remember, we were looking at a rate cut cycle. If you observe the markets, the bond yields in the US have risen almost 80 bps from September lows, 3.6, and now it is around 4.4. So, it is clearly indicating that the policies of Trump will be kind of inflationary in the sense tariff hikes and immigration rules and the tax cuts. And in the previous tenure, the fiscal deficit in the US under Trump really rose because of his policies. So, that is one factor so that will play. And obviously, this protectionism policy of protecting the domestic economy by raising tariffs across the board, we will have to see the final details, but as a broad policy it seems that global trade will have some impact.
It is not as if everyone will get impacted because there will be shifting channels, because he wants to put more tariffs towards China and some other countries, so some other countries might benefit. But overall, it has an impact on companies which are exposed to global trade, while higher interest rates might help financial companies here, which are undergoing NIM compression. So, these are some of the thoughts initially.
But shifting focus back to our market because after a couple of days, it will be back to basics and that is about earnings. The Q2 earnings have not really panned out the way street was expecting and we are now talking about perhaps further downgrades coming in. Would you concur with that and if yes, what kind of downgrades are we expecting, let us say, at the Nifty 500 level?
Vinod Karki: Yes, so for example, the earnings season, I mean, the first half of this year itself has seen some seasonalities which may not continue and one should not extrapolate them. For example, we had the general election related, the budget itself was in July end and then we had unseasonal rains, floods, and then the whole Pitru Paksha where people put off buying anything was in September. Last year, the Pitru Paksha was in October, which is in Q3, so the Q3 will have a favourable base effect this year and the government capex really fell during the first half because of these factors, which is the budget being late and elections.
And we are seeing the first signs that the government capex has started to really pick up in the September number that we got. The high frequency numbers which we got over the last two days, PMI manufacturing, services both picked up. So, there was a seasonal slowdown due to these factors in the first half and that should not be extrapolated and because of this slowness, there was some downgrades, 1% or 2% I guess at the Nifty level, but we will have to see how if the second half starts to pick up, there could be some improvement in the earnings momentum in the second half but that needs to be seen. But the factors are clearly suggesting there is some kind of statistical aberration this year which should not be extrapolated as structural.
Now, post the recent fall that we have seen on the markets, on the valuation front if you look at largecap valuations are largely now at par with their five-year averages. But valuations when it comes to midcap and smallcap continue to look a bit expensive. So, are you preferring largecap over the mid and smallcaps? And sector wise, if you look at which are those sectors where valuations are now looking much more attractive post the correction?
Vinod Karki: Yes, so largecap preference over the mid and small we have been holding that view for the last several months now. And within largecaps value still lies in the large financials, I would say. Energy to some extent, some commodities, while not value but good growth but expensive kind of areas are visible in some discretionary consumption pockets and industrials basically. So, I would not bet on areas where the growth is a concern and the stocks are expensive.
But if I had to ask you on a risk reward basis, which are the sectors which are likely to lead the earnings growth from here on and on valuation basis they look comfortable, which are the ones that comes to mind?
Vinod Karki: Large banks look the best. I mean, especially after this Trump victory, if the interest rate cut cycle gets a pause and interest rates continue to remain elevated, the fear on NIM compression might reduce. And in the second half, if growth picks up, the credit growth also will pick up. While on the corporate side, the NPA cycle still is at cycle low and corporates are really in a great shape in terms of their balance sheets and there is some pickup on their demand for credit, so that is a space I would be quite positive, both from a valuation and from a structural perspective.
IT as a sector because the earning season to be honest was not very enthusing. I mean, largecaps just managed to meet the muted expectations, while midcaps have fared better but that has historically been the case and wise, they are not cheap because last four-five months they have run up. How should one approach IT at this point of time?
Vinod Karki: IT is quite challenging in my view. While the growth outlook has a lot of concerns, Trump, as you would know, that he is more protectionism oriented, so we will have to see what his policies are towards the IT services jobs that US absorbs. But in general global trade would be a concern under Trump, I would guess, plus the whole impact of AI on small, lower end coding and all it is already visible, so it has concerns on growth, while the valuations are quite rich I would say, so yes.