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00:00Good afternoon. Welcome. You're watching NDTV Profit. This is MarketIQ and I'm joined by
00:13the veteran investor. I have the absolute pleasure of having him right here with me.
00:18We have Mr. Manish Ray Choudhury to talk to us about, of course, Asia Global. So many
00:25things to talk about, Manish. Thank you.
00:27So let me start off first off with Asia. Two, three trends playing out. One is there's been
00:35a large underperformance in China, which seems to be reversing in some form. Japan has done
00:43extremely well. India, in comparison, year to date, not as impressive. Talk us through
00:51your views on what's happening and whether this underperformance in India will continue.
00:56Perfect. Thank you. First of all, it's a pleasure to be here. Thanks to you. Thanks to our viewers
01:01here. As you rightly pointed out, all throughout last, you know, more than two years, actually,
01:07North Asia, particularly China, underperformed significantly. And that underperformance was
01:14even more visible, even more, you know, sort of stark in the context of outperformance by India.
01:22In fact, there's a chart I have hidden somewhere. If you plot MSCI India and MSCI China, both in US
01:29dollar terms, for 20 years, right from 2001 to early 2021, they actually moved in lockstep. From
01:37early 21, the performances diverged. India skyrocketed, China went down. And I think that is,
01:45in a small way, reversing now. There are a couple of reasons behind it. First, India to start with,
01:51if I look at the beginning of 2024, India was expensive, no doubt, in comparison to its own
01:58valuation history, in comparison to their estimation. In contrast, some of the North
02:03Asian markets, particularly onshore China and Hong Kong, they were trading at significantly less
02:09than their long term average multiples. In fact, Hong Kong was, you know, if you look at HSI,
02:14it was about 8 to 8.2 times price earnings multiple, compared that to its 20 year average
02:21of a little more than 10 times. So, and there were stocks within the, you know, onshore China
02:29or Hong Kong, which were trading at ridiculous valuations, you know, not only low single digit P
02:35multiples, but dividend yields of in the range of 6 to 9%, which were no doubt mouthwatering
02:42to investors. At the same time, we had a few uncertainties in India, and possibly the most
02:50talked about is the one relating to elections, election outcome. I think as far as if I go by the
02:57popular opinion at this point of time, there seems no doubt that the existing government
03:02would come back to power. So there's a policy and political continuity that we can expect.
03:08But, you know, in the context of India, one never knows. Sure, right. And these data points about,
03:15you know, the, I would say the turnouts in different phases of polls, that also helped
03:21fuel some degree of uncertainty in India, which led to how the FIIs reacted, you know, the FIIs
03:29have sold in more than six to I think about almost $7 billion in the past couple of months in India.
03:35In contrast, when you look at the northbound Stock Connect data, they have been heavy buyers
03:40of onshore China, and even going by anecdotal evidence in Hong Kong as well. So this is really
03:48what's been happening in these markets. And I think the valuation gap has clearly corrected
03:53somewhat, but it's still not to the extent of where it should be. If I look at India's valuation
03:59premium compared to Asia, Japan, the long term average is about 30 to 40%. At peak at the
04:06beginning of this year, it was about 80 to 90%. Right, it has come down, no doubt, but it's still
04:11in the range of 50 to 60%. So one could argue that there's some degree of valuation correction yet to
04:17happen. Sure. Okay, I'll take a cue from where, from from where we've stopped at at the moment.
04:25Um, so where do you believe the gap is actually getting extended? It's because India's growth
04:35story looks too perfect in the eyes of investors. Because clearly we are seeing FII money come out
04:40of India, right? So, so is, is it largely that India's pricing in growth and China is the more
04:48pessimistic of the two? I'll come to Japan, maybe in the question after this. Okay. Um,
04:56I don't think there's a degree of pessimism about the long term growth prospects of India. You know,
05:03so everyone understands that this is an economy which has a strong demographic tailwind,
05:09which has other macroeconomic tailwinds in the form of the China plus one reshoring of the,
05:16you know, of the supply chains that we're talking about right now. So, you know, I think the growth
05:23story is well appreciated. Sure. But what valuations the investors are paying for that growth, that was
05:30going to be questioned. Understood. It was being questioned more in the context of small caps and
05:36mid caps, you know, but even some of the large caps, barring some of the private sector banks,
05:41were not really leaving any room for error on the part of the investors. So that was India from the
05:48FII's perspective. Got it. And in context of China, it was exactly the opposite. I mean, the things
05:54were beaten down to such an extent that it was quite clear that the market was being just too
06:00pessimistic about China. Now there are, of course, you know, and when you sort of peel the onion and
06:06go down, there are, of course, you know, what should I say? There are different opinions that come out from
06:14different investors. So, for example, if you look at the return on equity for India, that has actually
06:20been monotonically increasing. If you look at two or three years forecast, it is going to increase
06:25further from around 16 percent to about 17 to 18 percent. It will be significantly higher than
06:31cost of equity. It has been and it will be. On the other hand, if one looks at China, the return
06:38on equity has been in the range of 10 to 10.5, at most 11 for the past seven to eight years.
06:43Forecasts are not too different. So there is a degree of justifiability for those low valuations.
06:51And this is also well understood among the, you know, the foreign investors. So, I mean, while we
06:58are in the process of this valuation correction happening, will it go all the way to India coming
07:04somewhere close to China, China going close to India? I don't think so. India will and it has
07:10always been and it will continue to trade at a premium compared to Asia, Japan, because growth
07:16is stronger. Return on equity is higher than cost of equity secularly and the gap will possibly
07:21increase going forward. There are other macroeconomic tailwinds, but it is a case of
07:27excessive valuation correcting. And that's what we are seeing right now. And do you expect that to
07:32continue? I would say that much of this correction has already happened. You know, so that valuation
07:39premium has come down 80 to 40, 80 to somewhere around, I would say about 40 to 50, might come
07:45down another 10 percent or so with India continuing to trade in this range that we have.
07:52So it's been trading at a very narrow range. Sensex between 72 to 75,000. That's just a 4 percent
07:58range for the past six months. Sure. Right. So if this continues, maybe for another quarter,
08:04that itself will bring down the PE valuation by somewhere around 4 to 5 percent. Yes. Just
08:12think of the quarterly earnings growth and the prices remaining same. Sure. Sure. Yeah,
08:16that makes a lot of sense. OK, so so that re-rating happening, at least as we speak.
08:23Let me shift focus more towards global. You have U.S. bond yields which have come off a wee bit,
08:31but nonetheless are close to their highs. I can call it that way. Right. And we also have equity
08:39markets, Indian as well as global, which are very close to all time highs. Ex China. Right.
08:47What's playing out and how much of the rate cut has been priced in? And when when do you believe
08:55that there will be a window of opportunity for for investors to bite the apple before the rate
09:02cut happens? Yeah. Now, this is possibly the most difficult question to answer.
09:09Go back six months, end of 23, early 24. All the consensus estimates, you know, they were
09:16indicating six rate cuts throughout 2024. So now we are reduced to possibly one at most. Yes. You
09:24know, and whether it'll happen this year in September, that itself is under question. Is
09:29it going to happen in 24 or in early 25? If it doesn't happen by September, then we're too close
09:38to the U.S. elections. Would the Fed cut the rates in November or December? That seems a bit unlikely
09:45to me. So if it doesn't happen by September, then we possibly have to sort of brace ourselves
09:53for no rate cuts in 24 and look at 25 instead. I think a sustainable outperformance by emerging
10:04markets, and I'm talking about the entire Asia and the entire emerging market complex, including
10:09every market here, that would begin only after we are we have a reasonably certain narrative
10:17about the rate trajectory. We have now reached the peak. We have had a period of stronger or
10:24higher for longer. That's about one and a half years. And now we are going to have the rate
10:29cuts. I mean, that certainty has to seep into the market's consciousness. If that doesn't happen,
10:36we're going to be pretty much where we are, which is, you know, kind of three steps forward and then
10:40again, two steps back. That continuous change in narrative as far as the U.S. monetary policy
10:46action is concerned. I wouldn't hazard a guess, but if I were to give a very off-the-cuff kind of
10:53opinion, I'm not really very hopeful of a rate cut this year. You know, I think the Fed would
10:59continue to watch the data. You know, there are still reasonably strong employment numbers coming
11:07out because I think not just core CPI, but also the non-farm payroll and other employment numbers
11:12are being watched very closely. And I think the Fed would not like to jump the gun. You know,
11:18they would clearly want these numbers come down to manageable levels, close to their targets before
11:24making that decision. And I don't really see that happening in the next six months.
11:29Sure. And do you therefore feel that markets have scope from here to go higher in case
11:38of a rate cut whenever that may be? It may be 2025. And so that's the first part of my question.
11:45The second part is, what would the trigger be? In the past, it's been commentary. Would it be
11:50inflation coming substantially off and while the commentary remains the same? Or would it actually
11:55be a rate cut and the market will wait for a cut before it goes higher? Well, the market tends to
12:01look ahead, right? So, I mean, even before the actual rate cut event, some kind of an eventuality
12:09would possibly be factored into the market valuation. So, we will have to watch two data
12:17points very closely. You know, we will have to watch core CPI and there are various other,
12:23you know, like trimmed main or CPIs, etc., which various different economists have worked out.
12:29You know, all those inflation-related data points. We will also have to watch the employment-related
12:35numbers, not just non-farm payroll or the unemployment numbers. There are various others
12:40like jolts, you know, which are regularly communicated to the market. But, you know,
12:46it's something the market has to be clear that CPI, core CPI is likely now to come down to the Fed's
12:55target of 2%. You know, as and when that consciousness seeps into the market, that is when,
13:02you know, I think we will have a more sustainable rally in the market. Before that, we will have
13:07these tactical opportunities. Something trading at ridiculously cheap valuation goes up to usual
13:12normal valuations. Something that's too expensive comes down a bit. And possibly, you know, in the
13:19second half of this year, it's these tactical games that we will have to continue to play.
13:25Very interesting inflection point that we're at. We have elections, multiple elections across
13:30multiple countries, so multiple variables to track. But outside of that, I'll take a cue from
13:38the question just before the break. Do you therefore believe that a rate cut, India as well
13:46as global, would lead to a rally in the Indian market? And therefore, what should an Indian
13:52investor do in that context? India is right now going through what's called a time correction.
13:57The market stays flat, trades in a very narrow range. Earnings growth is still in mid-teens
14:04over the years. So over past maybe six months or so, the Indian valuation has actually corrected
14:11almost about 8 to 10%. I remember it was a little more than 20 times, 20.5 or so on Nifty,
14:17one-year forward P multiple. It's, I think, around 19.3 to 19.5. So this might continue for
14:25some more time, you know, till the uncertainties, both domestic and global, are resolved. After that,
14:32what are we looking at in the context of India? Would there be a significant re-rating from these
14:36levels? That seems unlikely to me. I would rather hang my hat on earnings growth driven performance
14:45of the market, which is the mid-teens kind of return throughout the year. And that is, you know,
14:51it's pretty decent from the perspective of a long-term investor. I mean, if he gets around 15
14:56to 17% CAGR over a long period of time. Sure. Okay. I take your point there. And just with regard to
15:05where the pockets of opportunity within India currently are at. You've spoken about large
15:12private banks. Right. What puzzles me is the re-rating there does not seem to happen,
15:18of course, various reasons. Right. I believe the investor community not able to identify
15:25where the asset quality challenges could come up in the next cycle could be one of the reasons.
15:31But your sense with regard to that particular pocket and why that re-rating has not played out
15:38yet. You know, you rightly point out and I actually hinted earlier that private sector,
15:44particularly frontline large private sector banks, could be an area where investors could make
15:51long-term significant returns. In the banking sector, we normally tend to focus on those banks,
15:58which number one, have a significantly better than average asset quality. Number two,
16:04the banks which are gaining market share. I mean, think of the public sector banks,
16:10they still have somewhere around 65 to 70% market share. But the private sector banks
16:16are chipping away at that market share regularly. They have much better tech,
16:20technological platforms, which are enabling them to gain market share.
16:26Earlier, the private sector banks used to be at very expensive valuations. I remember some of
16:32them trading at four times price to book or so. No longer. That's not the case anymore. Those same
16:37banks are down to about 2 to 2.5 times price to book. Right. So after this underperformance that
16:45some of these private banks have suffered for, I think, almost a year now, you know, it seems
16:52an opportune time for me to sort of focus on these private banks again. And, you know, if
17:00these drivers that I talked about, better asset quality, gaining market share,
17:07you know, one of the earlier drivers may not last, which is expansion of net interest margins.
17:12That might have come to an end by now. But the other tailwinds are still quite strong.
17:18So that's, you know, one of my reasons for focusing on the private sector banks.
17:23I mean, I would not be very hopeful of further strong re-rating of these banks from now.
17:33But even if they grow in line with their expansion in earnings or price to book,
17:39as I said just now, that's pretty decent returns from a long term investor's perspective.
17:45Understood. So you don't find them extraordinarily cheap,
17:49but you believe that earnings will now drive the stock upside.
17:54Absolutely. Value re-rating, not as much in your view.
17:59Okay. I take your point. With regard to maybe some of the other sectors,
18:04engineering, cap goods, we've seen extraordinary numbers on the back of, of course,
18:11very good infra spend, very good public spend. What's your sense with regard to private capex,
18:18if at all? And what's your sense with regard to now the valuations in a couple of these pockets,
18:24given that they've inched up by quite a bit?
18:28Right. Now, infrastructure, industrials, engineering, that's a bit of a tricky area.
18:34So the growth runway is very strong, you know, because I mean, and I personally believe that
18:41if we do have political and policy continuity, then this investments in infrastructure that
18:47we've seen, that we're continuing to see, that's likely continued,
18:51that'll likely continue going forward. And therefore, we're likely to see earnings estimates
18:57also moving up in this sector. A stock that looks relatively expensive today
19:03might appear relatively cheap tomorrow if the earnings estimates expand.
19:09At some point of time, this government capex infrastructure expenses and otherwise,
19:16that would seep through to private sector capex as well. You know, it has, I think it's been
19:22happening in a very small way, you know, but not really, it's not quite extensive at this point of
19:28time. Ultimately, we have to remember in India, all private capex cycles have been originated by
19:36government capex. It's the large government orders which force the private companies to expand their
19:42capacity, because they have to supply those government orders. Right. So, you know, I would
19:48think that, you know, it would have to start at some point of time. Everyone is now waiting for
19:54the election results. Therefore, looking at the policy and the next full budget sometime in July,
20:00I would really be hopeful about the sentiment on private capex improving by the fourth quarter
20:05of this year. Okay. And with regard to defence and railways, again, very similar theme,
20:10government spend. But really, in terms of just the way in which assumptions have been made,
20:16and the way in which stock prices have moved, it seems to be pricing in five, six, seven years
20:22of growth. What do you make of valuations at this point? Would you be cautious?
20:27You know, one year ago, I think with one of your colleagues, I was, you know, it was must have been
20:32in the same studio. And I was quite aggressively talking about exactly these railways and defence
20:38companies. Now, the way these stocks have moved, it does make me a bit cautious about their
20:45valuations. Unfortunately, I think the fundamental story is great. You know, India will have to
20:50invest more in transportation infrastructure, both intra city and outside the city. India will have
20:56to spend more in defence. And there is actually a, you know, kind of communicated target from the
21:02government to do that. Have the stocks discounted more than maybe even two to three years earnings
21:10runway? I think in most cases, unfortunately, they have. Okay. And with regard to any other
21:17pockets where you feel that there is a bit of caution, which is necessary for the investor,
21:23we've seen small and cap stocks as well as the index itself rally. It's been a one way street.
21:29Do you feel therefore that it's time to be a little cautious there? And any other specific
21:34sectors where you're cautious? I would definitely be more focused on large caps than small and mid
21:39caps now, you know, even though small and mid caps have corrected quite a bit. Among the sectors,
21:45I would be cautious about consumer staples. Okay, we are seeing rather pedestrian earnings growth
21:51over there, while many of the frontliners are trading at about 50 times speed. You know,
21:57so those are the two top of the mind recalls as far as you know, having a cautious stance is
22:02concerned. Right. And, and with regard to pockets where you still find an opportunity
22:09at this point, where markets have seen a decent ish rally. So where should an investor look at
22:16now in terms of look for value in this market, outside of private sector banks, we spoke about
22:22Yes, we did speak about that. I would also highlight the healthcare sector,
22:27you know, because they're both in diagnostics in generic pharmaceuticals, you know, there is,
22:35I think that potential growth is not really being factored in. After all, India is getting more
22:40affluent. Apart from buying fashion, retail, and you know, other stuff that necessarily means
22:49increased focus on healthcare on diagnostics on athleisure. I think that segment has not been
22:56played adequately. Amazing, that's, that's, that's a great perspective. Because chemicals also seems
23:04a bit ignored in that sense. So, but but it's been a great conversation. Mr. HRD. It's, it's,
23:11of course, it's an ever ending conversation. But unfortunately, I've been flagged that I need to
23:17close this, this conversation. But with that completely out of time on this edition of the
23:22show. Thank you so much for coming in speaking with us, my pleasure entirely, and giving our
23:27viewers all of that perspective. But it's time to say goodbye from everyone here. Thank you so much
23:33for tuning in and watching us. On the other side. We'll continue our live programming. Stay tuned.