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00:00Well, we are live at the JPMorgan India Investor Summit and in conversation with one of my
00:11favorite spokespersons, Sanjay Mukhim, he's head of equity research at JPM, joins us.
00:15Sanjay, it's been a really long time, but glad to be here.
00:18It's a pleasure being on the show.
00:19Thank you for having me.
00:20No, no, the pleasure is entirely ours.
00:21So, Sanjay, big conference and I'll come to the detailing of the conference as well.
00:25But I'm judging by what you told me just before the conference, that the India interest is
00:29very, very high.
00:31This is arguably, if I'm not wrong, as somebody was telling me, one of the largest investor
00:35conferences that you've done at JPMorgan.
00:38That's right.
00:39It is a reflection of the interest in the Indian equity market.
00:43Our attendance ratios have hit 1,000 delegates for the first time for a physical conference
00:48at JPMorgan.
00:49We are up in headcount about 30% YY.
00:53The number of corporates who are attending, the number of clients who are flying in from
00:56overseas destinations to join our events, the kind of speakers we have at our main tracks.
01:01This is all a reflection and, I think, a vote of confidence in the markets and the economy.
01:06Okay.
01:07And it's happening just at the right time, right?
01:08Because we've seen the first of the rate cuts from the Fed.
01:11Everybody's talking about we being in an easy cycle, though it's idiosyncratic because Brazil
01:15has raised, Japan is raising, et cetera.
01:17But largely, global central banks, as a pack, also cutting rates.
01:21How does that auger for risk assets at a time when valuations don't seem to be very favorable?
01:28It will roll back into the very, very hot debate, Neeraj, of whether you're getting
01:32a soft landing or a hard landing.
01:34If you're cutting rates in a scenario where growth is okay, that's the best situation
01:40for risk assets.
01:43Equities conceptually are an asset class that benefit from low inflation and high growth.
01:47If you get inflation coming up, which is why you get the rate cut, but growth is sustained
01:52at a reasonable level, asset prices will be supported everywhere.
01:55However, if the rate cut is happening because growth is slowing down significantly, then
02:01that's a very bad situation for equities or growth asset classes, right?
02:06I think the debate is still out which sort of a rate cut we've got.
02:10As of now, the market is of the belief that it's the former, that growth is fine, inflation
02:15has come off, it's great for us.
02:17And therefore, what we need to watch everywhere around the world, not just in the U.S. to
02:20my mind, does growth hold up or not, because if it doesn't, then equities might come under
02:26some pressure.
02:27What's your prognosis about the India growth, therefore?
02:29And what are you telling clients out here, thousand odd people, you said, right?
02:32What are you telling them?
02:33Well, mechanically, our printed growth numbers will come off, right?
02:35And this is just a math of the base effect and the way the deflator is calculated.
02:39We've seen that in the June quarter and that trajectory of it coming off a little bit mathematically
02:44is going to play out over the next three quarters.
02:47The only thing that's worth noticing is that India has had GDP upgrades in the previous
02:51three quarters, where printed GDP numbers beat everybody's estimates.
02:56This quarter, we've actually got a minor GDP downgrade, where it's coming lower than, let's
03:00say, the RBI's expectation.
03:02And this is reflected, if I may segue, Neeraj, in earnings in the market as well, whereas
03:08for the previous three quarters, earnings were beating estimates and we were seeing
03:11upgrades to, let's say, the NIFTY or MSCI India EPS.
03:14This quarter, around results season, we've seen downgrades, two out of three companies
03:18have missed numbers, which is very rare for the first quarter, and we see a minor downgrade
03:22to the index EPS number as well.
03:24So on momentum of activity, whether it is through GDP or through corporate earnings,
03:29we've seen a minor deterioration in the market in the last quarter.
03:32Okay.
03:33But if FY26 numbers estimates out there look okay, let's work with that assumption, are
03:39markets egregiously valued for you to tell your clients here that, hey, be very, very
03:46choosy about India despite the interest, or do you reckon people will go out and say that
03:51India is amongst the few bastions of growth?
03:53I mean, Japan, Spain, India, maybe US, very few economies growing and very few economies
03:58showing earnings growth.
03:59So never mind the valuations, let's put in the money.
04:02So again, you can make multiple stories out of this, right?
04:05If you look at the nifty 50, the top 50 large cap stocks in India, the weighted average
04:10PE is exactly the same as the S&P 500, right?
04:13So there is no premium, there is no discount, and we've traded in line with the S&P for
04:17many years.
04:18So in the context of a global equity valuation, India is not overpriced on the large cap basket
04:24at all.
04:25Yes, individual sectors may look well above average, and you can pick and choose those
04:29kind of data points.
04:32But the index itself, relative to equities in the US, is fairly priced in a way.
04:37However, if you go down the Ragniraj, and you start looking at stocks in the 101 to
04:42500 or 500 to 1000, and you take various cuts of that, all of those are at all-time high
04:48PEs, right?
04:49And PEs are difficult to contextualize because of the narrative of growth.
04:53If you then back work on a DCF, or if you look at the implied equity risk premiums,
04:58a very mathematical analysis of valuations, the equity risk premium in Indian equity markets
05:03is at all-time lows, meaning that the amount you're getting paid for taking the equity
05:08volatility is the lowest that it has been in decades.
05:12And this means that equity as an asset class is reasonably overpriced.
05:16Okay, so therefore my question, are you telling people to be very, very picky, or are you
05:20telling people that, you know, still, India will be good enough for your dollars to come
05:26in and get parked here?
05:28What's the message at the conference?
05:30Right.
05:31Look, we cannot tell people to stay away, because if they have a mandate to invest in
05:34India, if they have raised funds to invest in India, they have to invest in India.
05:37Telling people to not buy India is not really helping my investors.
05:41However, there are two or three points to make.
05:44If you buy at elevated multiples, the future return expectations have to be moderated.
05:49Let me give you a data point.
05:51If you had bought at the top of 2008, which was the top of the previous bull market bubble,
05:57even today, which is all-time high valuations, et cetera, your CAGR is only 8%, right?
06:03So timing of the market does depend or does drive future returns.
06:08So if you're buying at elevated multiples now, please keep your return expectations
06:12moderate.
06:13Yes, Indian earnings will grow, Indian earnings will grow better than other people's earnings
06:17and all of that.
06:18But don't expect a 15%, 20% CAGR in Indian equities for the next five to six years.
06:22You have to moderate your expectations of returns.
06:25The second point that we make, and this is slightly different from what you were talking
06:30about, is liquidity, right?
06:33And what always happens, in every bubble, everywhere in the world, the first thing people
06:38forget is liquidity.
06:39And what this means in the equity context, let's say you bought a stock today which is
06:43trading $30 or $50 million today.
06:46In a down cycle, your ability to sell the stock as a large-cap institutional investor
06:51gets diminished significantly because the liquidity disappears.
06:55So the second filter that we advise people apply in their Indian investments is a quality
07:00portfolio filter, where stocks will continue to trade even in a down cycle.
07:04You will have the opportunity to buy and sell even if things go sour, right?
07:09And things can go sour for a variety of reasons, global equity risk-off or whatever.
07:13Do not get tempted by the hot tip that you got of a stock that's doing extremely well.
07:19Make sure you keep your quality filters on in your Indian investment today.
07:23Okay, fair call.
07:26So future returns moderated, but pockets within the Indian landscape might still give you
07:33better than the average return that the index will give you, right?
07:36Yes.
07:37So I'm trying to understand where is it that those pockets are, and how are you choosing
07:40these?
07:41Is it based on the basis of earnings growth, or as you keep on telling me a number of times,
07:45earnings beat is more important?
07:47Correct.
07:48So let me talk about the second part.
07:49We've done a lot of quantitative work, correlation analysis.
07:53Stocks on a 12-month basis are driven more by earnings beats or earnings upgrades than
07:59to mere earnings growth, right?
08:00In fact, the correlation of earnings growth to 12-month returns is zero, right?
08:05Interesting.
08:06Yes.
08:07It's because earnings growth is probably already well understood and is priced into the market.
08:10Of late, however, we've seen some of that correlation deteriorate, because it's becoming
08:13mid-cycle, late-cycle, whatever you call it.
08:16So the correlation with earnings beats is weakening a little bit, but it still has to
08:20be one of the key filters in processing stocks in India.
08:25Without being too bearish, if you ask me about the prospects of Indian growth and economic
08:29growth, we can be reasonably positive.
08:31There is a lot of upgrade happening in India.
08:34There is a lot of assurance of growth, whether it is 8% or 6% is a debate, but it is still
08:39going to be a world-beating growth rate in many pockets you are seeing, like I say, India
08:44benefiting from the increase in per capita incomes.
08:47So the few sectors that we think will continue to benefit, we like, let's say, the real estate
08:52space in the country.
08:55India is massively under-penetrated on residential real estate, plus there's a second driver,
09:00which in India is what do you do with your money?
09:03One of the big reasons money is coming into equities is because fixed income is not investable,
09:07especially if you pay full tax, and therefore whatever savings are generated necessarily
09:12goes into either equities or real estate.
09:15So equities markets are doing well.
09:17We think the real estate market will continue to do well.
09:19We like that sector significantly.
09:21We like, let's say, power, where the power sector is reasonably tight.
09:26This is consensus.
09:27Everybody understands that demand supply is tightening fairly quickly, which stock, et
09:31cetera, is a debate to have, but the sector itself looks good.
09:36Stocks are slowing, Neeraj, and they have significant challenges because of a lack of
09:39deposits, but that's where the valuation comes in because it's the only sector where valuations
09:45make some sense.
09:47So if you have patient capital, if you're looking for nice quality large cap companies
09:51where you can live through a bit of a weak growth phase near term, I think banks look
09:57great.
09:58They look great to us for three years, to be honest.
10:01And one of the factors that a lot of people bet on, I would love your thoughts here, is
10:06that, abhi tak FI money hasn't come in.
10:09Now FI money will probably start coming in.
10:11People correlate it loosely to rate cuts and money coming into emerging markets and therefore
10:14India.
10:15I know you have an interesting view there.
10:16I'd love to have that view.
10:17But just before we get to that view, if indeed money does come to India, so many people out
10:23here at the conference, if they want to put in money into India, et cetera, would banks
10:26be the first port of call, highest weightage, good valuations, et cetera?
10:29And could that be a driver of banking stock fortunes?
10:32That's what everybody asks me, and everybody believes that is what will happen.
10:36That when the foreign institutional money finally closes their underweight in India,
10:39they will do it through buying banks.
10:41The only pushback you have of that is that foreign investors largely are overweight Indian
10:45banks to begin with.
10:47It's not like they have no exposure to the Indian financials.
10:52It remains to be seen whether the incremental money, if it all comes in, comes into more
10:57financial allocation.
10:58In fact, the question I get from investors by feedback is, give me non-financial ideas
11:02in India, because we already have a decent allocation to Indian financials.
11:07So it's not necessarily straightforward, oh, when the foreigner buys, he will buy banks.
11:11We'll see.
11:12But to your first question, what is the effect of rate cuts on flows into EMs?
11:17The historical evidence is that rate cuts drives money out of the US economy, drives
11:21money into EMs, and we get our 20% share of EM flow.
11:26But that is not the prime mover.
11:29The performance of equity markets, the performance of currencies are all driven by growth differentials
11:34in the US.
11:35So when, let's say, the US economy slows, and that's why you get rate cuts in the US,
11:39the growth differential shifts slightly in the favor of EM, and therefore, the money
11:42flows into EM.
11:43But if in this instance, you see US growth slowing and EM growth slowing at the same
11:48time, because China, let's say, is still struggling to recover, and North Asian countries are
11:53seeing a technology slowdown, then the growth differential doesn't necessarily move in
11:56my favor.
11:57It's just everything's slowing at the same time.
12:00That may not be a great sort of scenario for flows to EM.
12:05But India being such a high weightage in the EM basket, can India get idiosyncratic flows
12:09or not quite there yet?
12:10So the evidence we have so far is that most of the funds coming into India are EM funds.
12:14There has been a ballooning of India-dedicated funds.
12:17So there's a lot of India-only funds launched across the world.
12:21But the AUM in that is still relatively modest compared to the EM basket.
12:25Yeah, obviously so.
12:27But is it still impressive enough or not quite?
12:29No, it's a good start is what I would say.
12:31It's a good start, what you say.
12:34One last thing.
12:35I remember this very interesting conversation that I had with you two years ago, wherein
12:40you said that, OK, looking at how we are right now, this was in March sometime, I think 2022,
12:452021, I'm not quite sure.
12:46And you told me that the return that we expect for the rest of the year is zero.
12:50Now, I would love to know, we are not in March, we are in September, there is an easing cycle,
12:55so on, so forth, et cetera.
12:56What is your expectation for returns, if not for the next three, four months, then let's
13:00say for the next 15 months?
13:01Well, our published forecast for the next three, four months is by coincidence zero.
13:05Sorry, I couldn't help it.
13:08We haven't put out a number for next year as well.
13:10And we'll get back to you when we get our heads together on this.
13:14Because right now, the world, the equity market globally has a lot of macro challenges.
13:19With the elections in the US, the policies of the new administration, the debate on whether
13:23it is a soft landing or a hard landing, I think that will have a lot of impact on our
13:28prognosis as well.
13:29OK, my final question, a bit about the conference, the nature of the people coming in.
13:33Are there newer participants, completely new participants?
13:36Part one of my question is that.
13:37Part two of my question is, the corporate participants in the conference, are these
13:42largely from the themes that you like, or are there some exciting ones out there which
13:47you haven't necessarily made it a part of your overweight?
13:50Like you mentioned real estate, power, etc.
13:52So maybe some presence might be there beyond that.
13:55So give us an answer on both of these.
13:57So in terms of investors, yes, there are people who are discovering India in a way.
14:01But I must highlight, at least in my opinion, Neeraj, there is not that many left.
14:07India has been reasonably well understood, studied, even by whole pools of foreign money.
14:12They may not have invested in it, but I doubt there are too many people unfamiliar with
14:17at least the large caps in India.
14:19On the corporate attendance, yes, there's a whole bunch of people, but it is sectorally
14:23diverse.
14:24We do not try and filter our conference to what may be working now or looking now, because
14:29of course, investing is for hopefully a medium term.
14:33Hopefully indeed.
14:34But Sanjay, such an impressive lineup from what little I've seen.
14:37Thank you so much for having us here at your summit and all the best for a grueling next
14:42five days, I presume.
14:43Well, thank you very much.
14:44It's great to have you here as well, Neeraj.
14:46Thank you so much.
14:47And viewers, thanks for tuning into this very interesting conversation with Sanjay Mukhim
14:50out of the J.P.Morgan India Investor Summit.