How would you term the recent rebound in the market? Does it give any confidence that the worst is over?
We’re positive on the US market because I think all the growth-unfriendly or market-unfriendly actions were taken first. The growth-friendly actions like tax bill, deregulation and financial conditions easing are now coming. And, earnings revisions in the US appear to have bottomed out and, in fact, are now inflecting and becoming more positive.
Our view on the US market continues to be pretty constructive. Now, all of this comes with a caveat. If you don’t get a resolution to a lot of the more complicated trade situations, like those with the EU or China, that’s obviously going to remain a headwind-and a persistent one. Which is why I tend to feel that the deal with India is actually more straightforward.
What about Indian markets?In India, the market recovery is entirely a function of the revival of government spending and rebound in rural demand. Even if you don’t see 7.5% persist, but say, 6.5% real GDP growth and 10-10.5% nominal-that’ll provide a lot of support to the markets. Because that’ll translate into mid-teen earnings growth and mid-teens ROE.
Aren’t valuations a sore point?A lot of people actually question the “Multiple India” trade. They say it’s expensive, etc. And yes, it’s expensive relative to where other markets are trading. But show me a market outside of the US that has high earnings growth, high return on equity, and low volatility. The US trades at 21-22 times earnings too. India trades at 21-22 times earnings. You could argue that the growth rates in India are higher but then the cost of capital in India is also higher.Do global asset allocators think the same way about India?Last six to eight months, the view was very cautious because of the slowdown in the macro, and earnings disappointment. Some capital was reallocated to China tech after DeepSeek, some capital went to Europe because there was this notion of fiscal expansion in Europe out of Germany. I think that’s inflected. The global guys, or at least the classic long-only global guys, tend to be value-conscious. There’s a view that India is expensive as a market. But honestly, for as long as I’ve been doing this, I can’t think of a time when India hasn’t been expensive as a market. But it continues to perform as a market because I think you’ve got to think about value in the context of earnings growth, returns on equity, low beta and macro variables. You get that package at 21 times earnings, not at 12 times earnings.
Coming to the US, this is the first time in recent times we are seeing the dollar sliding and Treasury yields going up. What are your thoughts?Growth is going to slow in the US. So a combination of what was actually supporting the dollar is now not going to be there. Our view is that the dollar continues to weaken for the foreseeable future. This year it’s down against a basket of major trading partners by about 7-8%. We’re of the view that it probably drops by an equivalent amount over the course of the next year or so.
And the US Treasury yields?That has a whole variety of factors at play. The most important one is the assessment of the US fiscal deficit. And, this tax bill is going to be growth accretive, but the concern that it’s creating is that the deficit stays close to 7%. And a 7% deficit will mean that the US government is going to have to borrow a lot. And if the US government has to borrow a lot, then what happens to yields is a big question. Particularly as the traditional buyers of US Treasuries-Japan, China, perhaps even the EU-are perhaps not going to be as big as they were in the past.
So, is the risk-off sentiment in dollar-denominated assets for real?A little bit of it has happened. But if you think about it in the context of the amount of money that went into the US over the last 10 years versus the amount of money that’s actually come out. It’s very, very small. And the number one reason for that is that there is no market in the world that gives you the kind of scale the US market does.
The question is where are you going to go if you have meaningful amounts of capital to deploy? Ability to do that in meaningful way is limited, just given scale and depth of markets relative to scale and depth of US. Historically, when the dollar weakened, money flowed into emerging markets. Can that happen again? Money has flown out of the US to emerging markets. But at the margin. Emerging markets can’t absorb that much money. I mean, the amount of foreign capital that over the last 10 years has gone into the US—forget the underlying asset class—is over $10 trillion. If a few hundred billion moves into EMs, that’ll have a real impact on emerging markets. The point I’m trying to make is that this (outflows) will be a small percentage of what came in, because the rest of the world does not have the ability to absorb that kind of capital. That places the US in a pretty special position. In India, there’s a flood of paper (IPOs, promoters selling) in the market.
Does that tend to cap the upsides for equities? The best thing for Indian market is more paper coming, more liquidity getting generated as a result of paper, and more asset managers trading these markets more actively. If there’s too much paper, it has a near-term impact.
