They say that if you are a long-term bull, ETF is the best and the cheapest way to go. So, I am just keeping it very, very, very simple. But your clients would say okay we know that already. Tell us what we do not know. So, what are you telling your clients, your prospective clients that what they do not know in terms of the market links, connections, and valuations?
Manishi Raychaudhuri: Well, in the near term I am perhaps telling them not to invest in India, not even in the ETFs. In case you are looking for a parking space for your money, gold is a good alternative. Gold ETFs are what I am doing personally. So, yes, I will elaborate on all these things. Why not India?
Manishi Raychaudhuri: Why not India? Two things. Number one, look at how and this is possibly the most important variable that we all need to look at, the consensus earnings estimates. I actually pay relatively less attention to this whole topic and discussion of GDP growth, etc. It is a good talking point, but it does not really generate returns. If you look at consensus EPS estimates for India, any index that you look at, they are down about 7% from late September. The market is down 10%, but it means that the valuations have not really corrected all that much, they remain almost as expensive as they used to be in mid to late September.
When you look at the relative valuations, India in relation to Asia ex-Japan, that argument becomes even more egregious. India is on a forward PE basis trading at about 62% premium to Asia ex-Japan. The long-term average is 38%. On price to book it is between 80% to 90% premium.
The long-term average is 60%. These premier they need to correct. It can happen in two ways. India correcting or rest of Asia moving up. As of now the latter is happening. Just look at how Hong Kong behaved recently, how Korea has done. Korea is up about 5% to 6% this year.
I think investors are beginning to understand that there are cheaper alternatives which give them similar growth profile, similar earnings growth profile in the medium term but available at far lower valuations. Can you compare historical averages to predict future because the reason why they got historical averages is because interest rates were different, dynamics were different, political policy were different. When we say okay India is trading at a premium to China, but I would say that China is a different beast. How can we compare these two things.
Manishi Raychaudhuri: Ultimately a stock price is the cash flows discounted to the present value. Now, if you believe that there is a certain stock in this universe which is likely to generate a certain stream of cash flows going forward in the foreseeable time horizon, then it makes sense to compare similar stocks across time periods. So, now when you compare Indian consumption, let us say the consumer staples like Levers or more egregious are the paints companies like Asian Paints, etc, and compare them to some of the consumers or consumer proxies in China. Yes, the growth rate for these cash flows would be a lot lower in China.
But even accounting for that the valuations are not really comparable, valuations are possibly egregiously high in India and that is what worries me and in the particular context of earnings estimates coming down, it is even more worrisome because then what is expensive today would appear more expensive tomorrow.
So, other than staples and some of the consumption plays like Asian which, of course, is a unique story because of the competition in the space, where is it that you feel that the valuations have run up far ahead and people were pricing in multiples even two year forward. We do not think that kind of earnings growth is actually going to come in.
Manishi Raychaudhuri: Many of the public sector companies, the defence related companies, many of these the manufacturing darlings I would say, so to a large extent industrials, manufacturing, consumer staples which is a significant part of the market would fall into that bracket.
We were just flagging for our viewers as well that IT as a space you are still bullish on and we were just hearing out the commentaries, it is kind of a mixed bag. Even some of the companies which have come out with the decent earnings guidance upgrade, they are not finding investor interest right now. So, what is your take on the IT?
Manishi Raychaudhuri: IT unlike many of the sectors that investors are focused on today which are essentially domestic focused sectors, IT sector in India generally gets its revenue from the developed markets and that is United States pretty much. We are living in an age of US exceptionalism where the growth rates in the United States we all thought US would be drifting into a recession. Did not happen. No one really talks about that anymore. It looks like US would still continue growing at about 2% to 2.5% and especially the banks they have reported not only good numbers, they are likely to report similar numbers because the bond yields are high, interest rates likely to remain elevated, which means that their interest margins would possibly be supported.
Those companies are the biggest contributors to the revenues of the IT companies. So, yes, I mean today it is not really the kind of the topic du jour. So, I mean it is not getting investor interest at this point of time. It would need a few more sets of numbers to come through, a few more articulation of guidance on the part of these companies before that interest builds up.
But it has been a long, long, long winter. TCS is not ready to commit a double-digit growth. Infosys numbers do not add up the formal number that there is a double-digit growth coming anytime soon. Wipro is still a sleepy company in terms of what they can achieve. So, my point is that it has been about three-four quarters that the turn was supposed to happen and for next two quarters I do not see the turn happening. So, at a time when markets are searching for growth, they are hungry for growth, why would they go towards IT which are anaemic when it comes to growth?
Manishi Raychaudhuri: You see, I do not necessarily agree with you that over the next two quarters that growth articulation would not come through.
With all the Donald Trump on the rhetoric on H-1B visa, the terrain could get tough rather than easy.
Manishi Raychaudhuri: I mean, see this whole Trump administration and that MAGA team that is also divided across the spectrum. On one hand you have the techies, you have Elon Musk and you have the others who actually want to import good quality, high quality manpower. On the other side you have the Laura Loomers of the world who are pathologically opposed to all H-1B.
As of now, I mean going by the kind of news flow, the kind of imagery that we are seeing from the Trump administration and particularly the inauguration, it is clear that the big tech clearly has more leverage on the Trump administration.
After all they are the money bags, I mean they have the money. So, I would not be too bearish on the negative news flow that we are hearing on the H-1Bs because in a large alliance like this you will have these diverse opinions on different parts.
Trump taking the power, what could be the likely impact on the global markets because just yesterday after the inauguration we have seen a lot of these comments coming up. There was a reaction in the crude oil prices that the energy transition could be where the US could be leading from the front. Other than that, there is some announcements on the EV. So, where do you feel that the focus will be on?
Manishi Raychaudhuri: One area where the Trump administration’s policies would be drastically different from the Biden-Harris administration would be what he just mentioned, the energy policy, which possibly means that many of these climate agreements, the net zero targets, they could get pushed back. Not officially, I mean I do not think India would articulate that okay I am pushing back my net zero target from 2070, neither would China. But at the same time, it would mean that production of crude and possibly demand for crude would be on a slightly higher keel than we have seen earlier. On the other hand, the incoming Trump administration, they have clearly articulated that tariffs they are coming, not just on China but also on the other trading partners.
He talked about 25% tariffs on Canada and Mexico, could be a negotiating tactic, no doubt. I have seen that in the Trump 1 administration also, but it means that while in Trump 1 administration it took about one-and-a-half years to articulate these policies, now it will happen right off the bat. Now there is one important difference between Trump 1 and Trump 2 and that is inflation.
Today, we are living in a much higher inflationary environment and a much higher inflationary outlook going forward, which is reflected in that discussion that we are hearing over the last one week, that the tariffs would be imposed in a phased manner, 2% to 5% every month, which means that the policy makers are actually conscious of what is hitting them. So, it is kind of going to be a mixed bag, but over the next one quarter at least, you will constantly hear these various different news flows. So, it is going to be volatile, grab your seats, and just embrace for uncertainty.
