India’s Next Market Phase

Welcome to Thoughts on the Market. I'm Jatinaya Moghonstanis Chief Asia Economist. And I'm Rhythm Deswai, Moghonstan Li's Head of India Research and Chief India Equity Strategist. Today, the biggest takeaways from our India Investment Forum in Mumbai. From the shifting outlook for India's markets and flows to the sectors driving the next phase of corporate earnings and capex. It's Friday, June 12th at 7pm in Hong Kong and 4.30pm in Mumbai. Rhythm Moghonstanis India Investment Forum took place in Mumbai last week and I was there with you. These events are a great opportunity to speak with investors who come across from the globe to attend. Now that we have had a few days to process the conversations, what stood out to you? What was the biggest shift in investor sentiment that you picked on? So, Jatinaya, I think it's been the case of a continuing story about India. Domestic investors look that they are bullish and foreign investors continue to stay rather cautious on the Indian markets. We could see that in the overall attendance. In contrast, I think domestic investors were looking for the next stock that they wanted to buy. They were seeking opportunities and there was a lot of interest in meeting companies. Before we get into markets, let me turn back to you from a macro side. India's growth story remains strong but relative growth appears to be cooling. This is in contrast to markets like Japan, Taiwan, Korea and the US. How should investors think about India's macro positioning in that context? So, when I look at the macro data in India, they're all indicating a meaningful upside in the growth trend. So, I'll just cite two key cyclically sensitive macro data points. One is the banking system credit growth and number two is the auto sales, particularly the passenger vehicle sales. So, bank credit growth is growing as of the last bi-weekly data point that we got. It's growing at 17.7% year on year and car sales are growing at 27% in the month of May. But as you were mentioning earlier, the relative growth opportunity is a challenge for India. And to just share the numbers on the earnings growth for the first quarter that we saw across the region, we saw Korea's earnings growth at 170%. We saw Taiwan's earnings growth at 48% year on year, Japan at 33%. The US has seen a growth of about 27% year on year. So, in that context, when India is reporting 13% growth, it's becoming a challenge for investors to look for opportunities in India relative to other markets, either they are more focused on the other markets than India. So, let me come back to you rhythm. Staying with the investment implications, India projects, stable valuations and strong corporate earnings, but its relative growth advantage has narrowed. How should investors reconcile this contradiction? If I go back 35 years, as long as we have the MSCI index series and as far as I have been in this industry, this is the lowest relative multiple in India straight ahead. Indeed, growth last year was weak, but if you see QOQ, we have started to accelerate. The broad market earnings growth trajectory has shown a doubling in the quarter-ended March over the quarter-ended December. But it underscores the point you made about the relative growth complex. It's clearly not in India's favour. And a lot of the capital in the world is shorter-morerented, and it cares for what growth is going to come in the next quarter or two. And that's the state of the market right now. However, what I would say is that equities is a quintessential long duration asset class. In the long run, what matters is terminal growth. I don't really think India's terminal growth has moved much. It remains far superior to a lot of other countries around the world. And therefore, I think this does present itself as a great opportunity for a long-term investor. While the markets are digesting this relative growth, this advantage that India seems to have over the next say three or four quarters. And with another theme from the forum was policy action to attract capital. Policymakers announced a number of measures right as our conference ended, and they aimed to withdraw withholding tax on debt investors, also providing banks with an incentive to take up more dollar borrowing. How central are these measures to sustaining foreign inflows into Indian markets? I think the measures taken by policy makers are very important, probably amongst the most important policy actions this year. The removal of taxation on debt investors will make a difference. The provision for hedging to external commercial borrowings, as well as to foreign currency deposits will make a difference. It should boost flows into India over the next 12 months. That said, these measures may not help the equity flows, because the equity flows, I think, are going to depend on the relative growth situation. Now, there's only that much India can do to lift its growth. It may accelerate to the high teens. So growth elsewhere needs to accelerate for equity investors to return. Or India needs to see the start of a major IPO cycle, because in primary issuances foreigners do come to buy, and that may change the net picture on FBI flows in the equity markets. But as far as the debt markets are concerned, I think the measures taken last week are going to prove to be quite important, and India should see the benefits are growing over the next few weeks and months. Jathan, from your perspective, how important is the policy backdrop right now in determining whether India can keep attracting long-term global capital, despite more competitive returns elsewhere in the short run? So, Rhythm, I think the key focus for the policy makers had been with these measures to boost short-term capital inflows to stabilize the currency. There has been a balance of payment deficit. So, from that perspective, the short-term capital inflow augmentation effort, as you mentioned, has been the correct move. But from the long-term perspective, we think that the government needs to boost comparitiveness of the Indian manufacturing sector. Because in the context in which AI could affect India's services exports, there is a need to augment more export receipts from the manufacturing sector. At the same time, if they improve the comparitiveness of the manufacturing sector, it will help India to attract more capital inflows from long-term investors for the purpose of FDI. And the good news is that the government is on it. They are taking a number of measures to boost that comparitiveness in the manufacturing. But we think that there is more action needed. And hopefully, in the intention to improve the balance of payment dynamics and exports from the manufacturing sector, we will see more actions from the government in the coming months. Jyotan, you've also written extensively about the structural capillar spending cycle in Asia and India. Can you walk us through the key details here, especially in the Indian context? I think the key story that we are observing, it's sort of more or less global, but definitely very clearly seen in Asia, that there seems to be a super cycle for Capix as well as industrial activity. This Capix cycle is effectively driven by spending in four key sectors, and that is AI and AI related digital infrastructure. Energy, defense, and industrial on-shoring related Capix. As far as India is concerned, we are seeing investments in all the four segments that I just mentioned. In fact, it's significant amount of activity in the space of energy. Similarly, we are seeing a lot of policy measures that I mentioned earlier in terms of boosting manufacturing competitiveness. But at the heart of it is government's effort to ensure industrial supply chain. So India's Capix has also inflicted higher. Having said that, the difference between India and let's say North Asia, which is Korea, Taiwan, Japan, and China, is that they are also a big player in the export market for capital goods, when there is global Capix cycle upswing happening. Nevertheless, India will see the benefit of this Capix cycle in terms of its own growth push. As well as improvement in productivity. So, Rhythm, how would you think about the sectoral opportunity within the Indian markets? We see a lot of interest in some of these sectors which you mentioned. But actually, I would like to start off with financials. I see the banks in a very sweet spot. Balance sheets are in pristine condition. The interest rate cycle has dropped, which means margins for the banks have also bottomed, and credit growth is finally accelerating. If this Capix cycle unfolds like the way you are describing it, I think financials will stand to gain the most. And interestingly, the valuations are quite good, both on an absolute as well as on a relative basis. Also, of course, investors can go directly into those sectors which are doing this capital spend, energy to start with semiconductors, fertilizers, data centers, and energy. the only thing to note here is that not everywhere are the valuations attractive enough, because in some cases the market has recognized the coming growth cycle and has started to price that in. So we have to be careful about the valuations. But I think financials and industrials are clearly great opportunities in the context of this this, Capix recovery that India is likely to see in the coming five years. And initially the most requested companies at the summit, rhythm-bare consumer sector companies, what do you think investors are looking for at this sector over others? So Chetan, I think from a structural perspective the Indian consumer is quite clearly the best place to be. In fact, I would say that it's the leverage that India enjoys over the rest of the world. The 1.5 billion people in this country are split across 150 cohorts of 10 million each and each of these cohorts have got different consumption opportunities. So depending on what product or service you are offering to your consumers, there's a market in India in which in nominal terms is growing between 10 and 15%. As we know last year India counted for something around 17 or 18% of global GDP growth, which means depending again on what you are selling to your consumer, India could be between 10 and 100% of your revenue growth. So India's consumer is something that hardly anybody can avoid. So in summary, Chetan, when I look at it from an investment opportunity, financials, industrials and consumption, not necessarily in that particular order, are probably the best places for investors to look at. However, IT services, I think could be the dark horse. It's a sector right now which is disrupted or potentially disrupted by AI. There's a lot of confusion there, but I think as the dust settles on this, it may emerge as one of the most interesting areas for investors to look at. So there's a lot of stuff in India happening right now. I think growth is accelerating, valuations are looking quite interesting. In fact, the best that they've been in many, many years, training performance suggests that investors are not positioned at all. And if things start looking up, then India could be a very good market in the coming 12 months. Rhythm, thanks for taking the time to talk. Great speaking with you Chetan. And thanks for listening. 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