It’s been an eventful week in some ways, as there were many noteworthy events, whether it was the US election or the FOMC’s interest rate decisions. Also, there was a Diwali festival in my hometown, so I had to look up Diwali sales and car sales. Tell me, how do you read the different signals coming from the market? First, let’s talk about the US election.
Manishi Raichaudhuri: It is perhaps the most important development that the entire world has been waiting for, including financial asset investors, both stocks and bonds.
And the initial fear was that it was going to be a very close call and an environment where the results would be prolonged in the sense that it would take several days to get the final results. But it hasn’t resolved itself, and Republicans have won in a landslide. This is clearly a good outcome for US stocks, as it will almost certainly lead to lower corporate taxes. It also leads to less regulation in certain sectors, for example banking.
But at the same time, this means the US budget deficit will increase, so it’s not so good news for bonds.
It also suggests that labor costs may rise in the future as a result of anti-immigrant policies and the deportation of thousands of illegal immigrants, which could result in higher inflation rates, resulting in The pace of interest rate cuts is expected to be slightly slower than initially expected. So what does this mean? So all this adds up to good for U.S. stocks and bad for U.S. bonds. And at the same time, this may not be such good news for emerging market stocks. That’s because it also means the US dollar will remain stronger than anyone expected. We are already witnessing this situation and it will likely continue for much longer. This means that capital will continue to flow out of emerging markets. So it’s kind of a mixed bag, and investors need to navigate carefully across the spectrum of financial assets.
How do you feel about India itself? After the adjustments we’ve seen over the past month, month and a half, are we now closer to a reasonable zone? Are there any pockets that look interesting?
Manishi Raichaudhuri: In a sense, India’s revision was inevitable. Back in late September and early October, India was trading at an almost 90% premium to the Asia ex-Japan average. What happened is India corrected in the range of 8% to 9% and other Asian markets, especially Greater China, China and Hong Kong, jumped around 20% to 22%. As a result, the relative premium that India once enjoyed has declined. I think this is a very healthy correction and a very healthy development. The premium has fallen from 90% to around 55% to 60%. At the same time, however, India’s profit forecasts have been revised downward. If you look at the consensus EPS estimates for 2025 and 2026, they’re down about 5% over the past month, probably five to six weeks, which is a significant departure from the trends we’ve seen previously.
So I think the whole Indian adjustment and this revaluation game that we’re seeing is not over yet. It lasts a little longer. India’s valuation premium will probably come down to around 35% to 40%, just to be clear, the average over the last 15 years is about 25%. So I think once the premium comes down to something close to those levels, investors will definitely look at India.
Some sectors and stocks have corrected more than the market. The market itself is a consistently compounding market with a return on equity that has exceeded the cost of equity over many years. Therefore, a quality market cannot really be ignored by domestic or international investors. The concern was valuation, which in my opinion is correcting and will probably be correcting for some time. That’s great and a very healthy development.
So you said there are pockets that you can see. When we talk about the Indian market, what are you very focused on and where should you actually go and look for opportunities?
Manishi Raichaudhuri: I have been, and continue to be, very positive about the private sector banking industry for the long term. If India is to continue growing at, say, 7% to 7.5% over the long term, that growth will need to come from investment and consumption, and private banks will finance that growth.
They have also gained more market share than public sector banks. Obviously, in the short term, probably over the next year or two, net interest margins are going to come down. They are already starting to happen. But in the long run, it’s nothing to worry about. We also look at engineering and advanced manufacturing. I would like to look at some of these EMS companies, electronics manufacturing, and now defense stocks that have probably adjusted quite a bit. Many of these are also beneficiaries of the so-called China Plus One. And given the Trump administration’s particular focus on raising tariffs on China, special efforts to restructure supply chains could gain traction going forward.
Regarding consumption, the situation is a bit complicated right now. Do you think it will recover once the glass is half full and you can get it for a little less now, or are you in the camp that says it’s problematic and should be avoided?
Manishi Raichaudhuri: I think over the next two to three quarters there will be a problem with consumption, especially urban consumption. In this current earnings season, we have seen major front-line companies talking about curbing consumption in urban areas, which clearly has something to do with creating job opportunities like we are seeing in India. I am.
And don’t forget that stock prices for many of these companies aren’t cheap. Even after recent corrections, many are still trading at 40 to 50 times earnings, and in some cases even more. So I would definitely be cautious about that universe in the short term. I’m going to be very selective. Long term, yes, I would like to focus specifically on consumer discretionary products rather than consumer staples.
