India quite moderately valued; global higher for longer riskoff affecting us: Ajay Bagga

Ajay Bagga, market expert, says “PSU banks are still looking quite good. Talking about valuations, I would say India is quite moderately valued. The problem is the global macro. These higher for longer riskoff is affecting us. We have seen about six-seven weeks of FII outflows on a net basis. So that is a problem. It is a constraint on our market's ability to rise fast. But the domestic funds that are coming in, are providing a good support and those should win through.”

Are you optimistic about the October series looking at the moving pieces?
We are waiting for a couple of events to pass through. One is, of course, the looming US shutdown. Historically, it has not had much of an impact but the reports are that this could last for anything like a couple of weeks to four weeks. In 2018-2019, it went on for six weeks and it had a minor impact on the GDP. So let us get that through, especially given Monday is a holiday in India, we can wait that out.

The other two concerns are: a)Chinese property loans that are standing at about 60 trillion Yuan. It is not a new problem, it is a three years old problem but the Chinese government has not been able to resolve it and now the position is that even quality real estate developers like Country Garden are facing a lot of issues of liquidity. So eventually the rescue package will come from the Chinese government which will be a trigger for the markets so you can position for that.


The third is, of course, oil. The Saudi internal objective is about crude at $95 and they have crossed that. So we are hoping that some more supply will start coming both from the Russians and Saudis. On an aggregate basis, OPEC plus can produce 34 million barrels a day. They are producing 28 million barrels a day and the market is under supplied by about 2 million barrels a day. So the Saudis can step in very easily. Now the question is will they step in right now or will the non-OPEC countries like Canada, Norway and the UK start trying to scrape the bottom of the barrel and increase the supply. I think we will have more clarity in a week.

What do you make of India's consumption patterns, particularly at this time of the year?
It is looking like a very strong festival season. Of course, in the next three weeks, we will get this quarter's results and we will have actual data. But whatever reports are coming out and anecdotal data says it is a very strong consumption season that we have seen in September, starting from Janmashtami onwards through the Ganesh Chaturthi festival. Now we will have two weeks of little subdued consumption or new things not being bought and then Navratri takes over and then we are into the Diwali season.

So quite strong auto numbers, two-wheelers are showing an uptick, FMCG is reporting consumers coming back. So the Indian consumption economy seems to be doing pretty fine and we should get strong numbers on the consumption side.

Valuation wise, how is the PSU Bank index looking? Within the financial pack, we have seen the PSU pack lead from the front in the September series? Do you see that runup continue? Are the fundamentals strong enough you think for further upsides?
PSU banks are still looking quite good. Talking about valuations, I would say India is quite moderately valued. The problem is the global macro. These higher for longer riskoff is affecting us. We have seen about six-seven weeks of FII outflows on a net basis. So that is a problem. It is a constraint on our market's ability to rise fast. But the domestic funds that are coming in, are providing a good support and those should win through.

On an international basis, there are very good opportunities available like one can borrow in Chinese Yuan and invest into Latin American currencies. Those kind of strategies have made 30-40% returns for international investors. The money market funds sitting out of the US are sitting on $5.5 trillion because they are making 5% risk free on the US one year-two year treasuries. So people are really not looking at putting it into emerging market equities.

A strong dollar is negatively correlated with the EM flows. So the dollar has to moderate and when that reverses, there will be sharp flows coming back to markets like India which will change the growth macro of India. On a top down basis also, it is more the risk-off globally than an India specific factor which has impacted our markets.

Domestic queues or global queues right now, If you had to make any contrarian bets at this point in time where the markets are poised, which are the sectors that you would go with? We have seen the pharma sector among the bigger losers in the September series. Would that be a contrarian bet?
Very simple alternatives are available. One is the infrastructure, the amount of money the government has put in, even in this year with Rs 10.5 lakh crore of budget and they have upfronted that investment. So we are going to see capex related stocks, the infrastructure creators doing very well. Real estate has started a cycle after nearly 7 to 10 years of being in the doldrums and that is going to last quite some time.

Then financials are the engines on which the economy runs. Within pharma, if one broadens it, then healthcare, diagnostics, hospitals will benefit from the Indian demographics, the Indian consumption story as well as medical tourism has picked up a lot after the post-Covid opening. So those segments might be better off.

But overall, in the generics, the US-focused players have too many uncertainties and then coming into a very noisy election year in the US, I would rather focus on our domestic stories – both as well as cyclical recovery stories. Autos again are looking very good. Again for the next two to three years, we are looking at an auto replacement cycle coming in, an EV cycle coming in. So we have enough opportunities within the domestic-focused world only in India.