It has been an eventful week of sorts because you had so many events to watch out for, be it the US elections, be it the FOMC rate decision. Also, back home you had Diwali and you had to look at the Diwali sales, the auto sales numbers. Tell me, how are you reading all of these various signs that you are getting in from the markets? Firstly, let us talk about the US elections.
Manishi Raychaudhuri: That is possibly the most important development that the whole world has been waiting for, including financial asset investors, both equity and fixed income.
And the apprehension originally was that we would get a long drawn out result environment in the sense that it will be a very close call and the final results would not be quite available for a few days. But that has not come to a pass and we have a landslide victory for the Republicans, which is obviously a good outcome for US equities because that almost certainly leads to corporate tax cuts. It also leads to lower regulations in certain sectors like banks, for example.
But at the same time, it is not so good news for fixed income because it means that the fiscal deficit in the United States is going to rise.
It would also mean as a consequence of the anti-immigration policies and deporting thousands of illegal immigrants, labour costs will possibly rise up going forward and as a consequence we will likely have higher inflation, which could in turn lead the Fed, the FOMC, to have a slightly slower pace of cutting interest rates than was anticipated earlier. So, what does this mean? I mean, when we all put this together, it is good for US equities, bad for US fixed income. And at the same time, it may not be such good news for emerging market equities, because it also means that the US dollar would stay stronger than anyone had anticipated. We have already seen that and likely this environment will continue for longer, which means that money will continue to flow out of emerging markets. So, it is kind of a mixed bag and investors will have to navigate carefully across the financial asset spectrum.
What is your sense regarding India itself? After the correction that we have seen in the month, month-and-a half, is it now approaching a reasonable zone at all? Any pockets that are looking interesting?
Manishi Raychaudhuri: India’s correction in a sense it had to happen. If I go back to the late September, early October period, India was trading at almost 90% premium in price-to-earning terms compared to the Asia ex-Japan average. What has happened is India has corrected somewhere in the range of 8% to 9% and other Asian markets, particularly greater China, China and Hong Kong, have moved up sharply by about 20% to 22%. And as a consequence, the relative premium that India used to enjoy has declined. It is a very healthy correction, very healthy development, I would say. From 90% premium, it has now come down to somewhere around 55% to 60%. But at the same time, Indian earnings estimates are also coming down. If you look at the consensus EPS estimates for 2025, 2026, over the last one month maybe five to six weeks they are down about 5%, which is a major departure from the trend that we had seen earlier.
So, I would think that the Indian correction that we are seeing and this whole valuation realignment game, it is not yet over. It will continue for some more time. Once India’s valuation premium comes down to maybe around 35% to 40% and mind you, the last 15-year average is about 25%. So, once the premium comes down to somewhere close to those levels, I think investors would definitely take a closer look at India.
There are sectors and stocks that have corrected much more than the market. The market itself is a consistent compounder with return on equity higher than cost of equity for many years. So, a good quality market cannot really be ignored by domestic or foreign investors. It was the valuation that was a concern, which in my opinion is correcting and will likely correct for some more time and that is great, that is a very healthy development.
So, you have said that there are pockets where you can look at. Which are those pockets that you are looking at very closely when you talk about the Indian markets and where should one actually go and look for opportunities?
Manishi Raychaudhuri: I have always been and I remain over the long term very positive on the private sector banking universe. India if it continues to grow at about, say, 7% to 7.5% over the long term, that growth will have to come from investments and consumption and it is the private sector banks which would be financing that growth.
They are also gaining market share over the public sector banks. Obviously, in the near term, maybe over the next one or two years, we would see the net interest margins coming down. They are already beginning to happen. But it is not something that would worry me over the long term. I would also look at engineering, advanced manufacturing. I would look at some of those EMS companies, the electronic manufacturing and maybe defence stocks now that they have corrected quite a bit. Many of these are also beneficiaries of what we call China plus one. And given the Trump administration’s focus on increasing tariffs, particularly on China, that is a particular initiative, the realignment of the supply chain, that would possibly gain momentum going forward.
Consumption, it is a bit of a mixed bag right now. Are you looking at it as half glass full that there would be a recovery and it is available at a bit of a cheaper rate right now or you are in the camp that one should stay away from it because there is a problem?
Manishi Raychaudhuri: I think over the next two to three quarters, we do have an issue with consumption, particularly urban consumption. In this current result season, we have seen the large frontline companies talk about urban consumption moderating and that is clearly related to the kind of employment opportunity generation that we are seeing in India.
And remember that many of these companies they are not cheap, even after the recent correction many of them are trading anywhere between, say, 40 to 50 times price earnings multiple, sometimes even higher. So, I would definitely in the near term be cautious about that universe. I would be very selective. Over the longer term, yes, I mean particularly I would focus on consumer discretionaries, not so much on consumer staples.