What is the world looking like? It is just utter chaos, but it seems like there is some stability for equity markets.
Shiv Puri: Yes, in the last few years I cannot think of many times where there has not been chaos in the global markets. But for the markets to do well typically it needs three things. One is, it needs free flowing credit. Second is, you need a strong earnings outlook and the third is, you need cheap valuations.
And if you look at the story in India 12 months ago, all three were yellow or even red. But today over the last 12 months, you have seen with the reserve pay increasing, liquidity into the system, with rates getting cut, we do have liquidity that is flowing back into the credit markets.
The earnings outlook which started moderating over the last 12 months has started to bottom. You are seeing that in the GDP numbers and therefore with the lag you will start also seeing that in earnings rebounding.
Valuations still remain high, they do not remain cheap but within that again if you look at what is happening in the larger names and the Nifty kind of names, those names look very reasonable; whereas if you look at the midcap and the smallcaps, they still look high.
So, we are two-and-a-half out of three in terms of what it takes to have a sustained market which is quite resilient and so therefore, the equity markets outlook is constructive, barring geopolitical risk which is something that we live with now every day of the year and those are inherently unpredictable. The global markets have made a bet that geopolitical conflicts are going to be regional and not global and as long as that remains the case, the markets are going to be okay. But that is obviously inherently unpredictable. But tariffs would be and we have definitely seen that get priced in in the markets for store I guess beginning March and then in the run-up to April. Since then, markets have rebounded, S&P 500 already at an all-time peak, and many other global markets as well, we are also pretty much close to that. But is that baked in into the prices?
Shiv Puri: I think the tariffs has created more uncertainty in terms of what those levels actually will be than the reality of what the impact is going to happen. And if you look at it in the context of India, exports as a percentage of GDP is still fairly low and most of that is still services.
So, in the context of goods, while it is still important for industries and it needs to be resolved, at the GDP level, at the economic level for India, it should not be that material an impact. However, the thing to keep in mind is, of course, consequences of consequences. The second-degree impacts of everything and so those are going to be determined by where these rates actually end up because obviously, they have been all over the map in the last six months.
And you spoke about how earnings need to solidify a little bit more for the funders of India to be a little more solid. Now, the quarter gone by, quarter four, we were already headed in a muted expectations which is why the numbers were looking fairly okay. But going ahead in the quarters to come, you are going to have the base effect from last year kick in. So, do you believe fundamentally we are going to be doing well or the numbers only going to look good because there was a weak base?
Shiv Puri: Well, if you rewind the clock a little bit, we had a huge bounce back in earnings post covid and you had 20% plus earnings growth for the index because covid was depressed. Thereafter it became a little hard when you entered the last 18 odd months and so you saw muted earnings growth in the single digits. When you look at the next 12 months, one, of course, as you mentioned correctly there is a base effect that will be favourable, but second is, there are other pockets that are starting to now pick up.
One, of course, as I said is credit is starting to flow more freely in the economy, you are seeing rural consumption that is starting to pick up, government capex which was pretty subdued looks like it is starting to move a little higher.
And the two real areas which still have not seen anything improve yet is urban consumption which is still fairly muted and the second is private capex, company capex numbers still have not picked up. But when you put all the pieces together, I still think it is two-and-a-half out of three or three out of four in terms of where we are. So, definitely, a better position than last year.
You talked about as to how there is valuation comfort still when it comes to largecaps. Where do you see those stories play out and where is it that you are finding those outsized opportunities?
Shiv Puri: Well, I think still there areas like, for example, private sector financial, especially the largecap names seem to be fairly reasonably priced at the moment and then again, if you look at some of the other sectors, valuations are always in context of what their durability and quality of the growth is going to be.
So, it is magnitude, durability, and quality. And so, if you factor some of that in, there are a few other areas even in consumer discretionary, in healthcare, especially in some of the hospital names that I still think have a very long runway of growth where I see opportunity.
Also talk about the about the fund flow that we are seeing because of late, the FIIs are seem to be making a bit of a comeback in the Indian markets and we did talk about the global uncertainty that still persists. Do you believe, can India be that oasis amongst all the emerging markets and the developed economies which are on the stock market front they are already at an all-time high and while Indian macros are now turning favourable there is a case where the fund flow can now turn positive?
Shiv Puri: It is. One of the things that FIIs have seen is that a lot of the money comes from the US and if you look at the S&P 500 over the last 5, 10, 15, 20 years, it has delivered dollar returns comparable or even better than what the Indian equity markets have delivered in dollar terms. And then, of course, you have added impediments here in terms of taxes and things like that that maybe some of those institutions do not have to deal with. So, if you factor that in, it is dependent on two parts, one is, of course, how well India does, but the second is how well India does relative to the S&P 500 to the US.
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