Vikash Kumar Jain sees short-term rally in India despite geopolitical and macro challenges

"The discussion is more about whether this is the right entry point or there is more that we could see to get a better entry point, I think that is really what the discussion has moved to," says Vikash Kumar Jain, CLSA Investment Analyst.

Tell me, what is the chatter around India at the conference? What are you picking up? Why so much selling here?
Vikash Kumar Jain: It is very interesting because we had our Asia conference in Hong Kong not too long ago. This is middle of September. And from then to now, given what the markets have done, discussions have shifted quite a lot. So, in September, big complaints from foreigners that market is still very expensive. Now the discussion is more in the territory of is this a good entry point or there is more left in terms of the selling in the market and what could be the impact of changes in the global macro with new leadership in the US. So that is really what has been a lot of discussion point. Most of the investors do agree on the long-term India story. The discussion is more about whether this is the right entry point or there is more that we could see to get a better entry point, I think that is really what the discussion has moved to.

You think it is just a India valuation problem or is it more money moving out of India to maybe other emerging markets or even the US?
Vikash Kumar Jain: So, what one needs to understand is where are we getting money from and this is my favourite statistic that I keep highlighting that of the $900 billion that is invested by foreigners into India, 90%, over $800 billion come from money which has freedom to move from one market to another. So, foreign money will always have influences of what they see in other competing markets.

Early part of October and through large part of October it was to do with suddenly China waking up the concern whether China has more legs and maybe that created a competition for this money. The second level of competition came from end of October to early November onwards as we were trying to get into the Trump trade and after the election results in early November there has been competition of money moving out from the broader EM basket into the US basket and all through this period, one overlaying competition has come from the primary market. I mean we have had quite a few listings. At a time when foreigners have taken out about $13-14 billion, we have raised $6 billion or so from primary markets in this quarter. So, there are all of these competing forces which have been in operation for the flow into the Indian secondary market. How do we see these forces panning out?

I think the China part of the worry is kind of addressed for now because there is more nervousness on China with Trump coming in than excitement. Their initial reaction of the policymakers over there has not really satisfied the expectations of the market, so that part of the trade is for now on pause at least. The US part of the trade, I would argue, the initial euphoria of Trump coming in and money moving in favour of the US and away from EM is something that is on works and possibly coming to an initial pause as well. Because if you see the macro setting, after he came in, he announced a few of important people will be part of his administration, that created another level of surprise.

There was a euphoria and then the next leg of news from there is only going to come after his inauguration on 20th of January, so that is a January event. So, I would say the initial part of that move is also done. Then, the third side of competition has come from the primary market. Now, this is interesting because if you look at the first nine months, we saw about little less than 70 IPOs in the first nine months of this calendar year and the median listing gain, that is the first day gain versus the IPO price, was 30% for those IPOs.

In this quarter other than one IPO, all the other IPOs have seen nowhere close to 30% gain. So, suddenly the overall, maybe the frothy excitement in the IPO market, you can also see in grey market premiums, kind of vanishing and not
so much excitement when new issues get listed, I think that part of the supply is also kind of cooling off.

We believe that we could be in a macro-lull period for a period of about one-and-a-half, two months, and that could at least be some kind of an interim rally which could happen.

Whether this is start of a next leg of the bull market or this is just a rally within a larger correction is a difficult question for us to answer. But at least a rally going into December, which is anyway a seasonally strong month, is something that we cannot rule out.

You are talking about that Santa Claus rally. But what is getting undone in the market today is well this worry regarding geopolitics. As we speak, there are headlines coming in that Ukraine has attacked Russia. It has made the first ATACMS strike inside of Russia and seems like tensions are escalating. If that does happen and the tensions escalate from here on, what happens to India? What happens to flow? Is it going to be a case that will we be back to domestics or how should one position themselves then?
Vikash Kumar Jain: Events like those simply highlight that whatever people are expecting in terms of a lot of things getting sorted out in favour of the US with President Trump coming in is not all straightforward. I think this is typical to a lot of such event-based rallies. We have had our periods of election-based rallies where the fact is reality is generally not something with changes just with a magic wand. It takes its time.

In fact, one of the things which was being talked about over the last week was perhaps a negotiation. Many macro commentators thought that a win with a peace negotiated between Russia and Ukraine in a manner which is more acceptable to both the parties is something which could be one of the first things that President Trump will focus on.

But as you can see with many such events, not all of this is something which is very obvious, very easily controllable. So, it just tells out that yes, you have had a euphoria rally, but not all solutions will be immediate. So, it just brings out that there is a period of unpredictability with a lot of policies that the President has set. So, reality might not be as dramatic as what such election-based rallies make market to price out.

But something which was doing well for us was earnings and that was the saving grace of sorts that made the valuation somehow acceptable because at least growth at that reasonable price kind of argument. What happens to it then? Is it completely getting undone or this is just a realistic moderation that street should have seen coming?
Vikash Kumar Jain: So, we have this proprietary India bull bear index, which had given a sell signal late September and we had turned quite bearish in a report that we had done where we were thinking of this being another worry. I would say there are a few elements of the earnings growth story which we should kind of spell out and separate out. The first part is expectations. Yes, there are certain areas where expectations are quite high. But at the same point of time, there have been some self-goals that we can possibly sort out in the second half of this fiscal. Like government spending has been down on a YoY basis in the first half.

Second half could look much better because if they were to stick to their annual budget plan, then government expending could be up 14% on a YoY basis for second half. Similarly, we have had two really bad inflation prints and perhaps with those being behind us, we see much higher base for the next November and the December month. Maybe inflation will look much better for those two months, that might allow RBI to get less hawkish.

So, a lot of those things could also create some positivity. But I think there is a part which was higher expectations cooling off, there is a part which might correct, plus excessive rain, limited activity. So, yes, earnings, if you have inflated expectations, could be disappointing but in general that typical 10% to 15% broad earnings growth story in India is something which is not going away. But there are times when we start expecting much more and that is where there could be that corrective phases for expectations that might happen in the market.