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00:00we're coming to you from the jp morgan conference right here in mumbai and who better than sanji
00:12mukim himself to kickstart the discussion on these very hectic two days up ahead thank you
00:17for having me thank you for having us so what's the agenda a lot of news flow and a lot of debate
00:24i guess what a time to have this conference it is you know and i was a bit hesitant to begin with
00:30because the market's been lackluster let's say it's been flat for a year but it's a massive vote
00:35of confidence this is the largest ever conference we've organized over 1300 delegates joining us
00:41the number of clients joining us is up more than 30 percent why why we have a greater number of
00:46corporates the buzz is really strong and like i said that's a big vote of confidence investors
00:51saying that look we don't care about daily volatility all this noise that you that you're
00:57referring to but india does present that long-term opportunity and people's interests are a little
01:02bit more permanent that noise might otherwise end it's good to hear that there is still excitement
01:07about it yes but you know it's kind of juxtaposed because on one hand you still have uncertainty on
01:12tariffs over the weekend you had all that h1 videos coming out and then uh from today onwards gst 2.0
01:20one of the biggest reforms in the last few years again kicks off so what are investors really
01:25feeling about india right now well if i roll this back to a few months call it late march to june period
01:33there was a sense of despondence in conversations that have we were having with investors oh nothing's
01:39happening and it's all looking very gloomy and the corporate sector were sort of echoing that as
01:45well that has improved to my mind and the setup for a bounce in indian equities looks very very
01:52strong to me and i i i want to talk a few reasons for this our earnings expectations have already been
01:59cut quite a bit actually typically earnings are cut in the later part of the fiscal year but we've
02:04done it ahead of time this year because of that sense of despondence that i was talking about
02:08on valuations stuff looks very expensive or an absolute basis but relative to global equities
02:15we are now at a better position so if let's i've written research on this many times the india
02:21valuations tend to track snp more than they track em okay historically the charts are the same the snp
02:27pe and ours is the same now we are like a 10 percent discount on the snp so you've got right size
02:32earnings expectations you're trading at a discount to global equity valuations and you have potential
02:38domestic catalyst which is the gst you referred to now you may not get a great september quarter
02:43out of it because people held up purchases in anticipation but the december quarter could turn
02:48out to be better so with that a little bit of a bounce in the market does look like a recent
02:54probability to us what are the kind of uh you questions that investors are now asking you in that
02:59sense uh you spoke about earnings you because we went for a early earnings cut normally it happens in
03:04second half but uh we and now i think most of the uh street is now looking at fs27 earnings and not
03:1126 because they were almost written off f26 in that sense so what are they looking at in terms of
03:17valuation when you see when you're telling us you know that we are mapping ourselves to s&p 500
03:22uh price to earnings uh and we are at the discount to that so how are how are we looking at uh and how
03:29global funds looking into it first as a word of caution we should not dismiss f526 quantitative
03:34correlation suggest that stock prices respond to 12 month forward eps not let's say the next fiscal
03:41but 12 month forward still relies on some outcome in f526 there's still six months to go really right
03:46so quantitatively the f526 number still matters and in another sense if you cut your f526 further you
03:52will be forced to cut f527 as well right because people did to track these in terms of growth basis
03:57so i do think that the f526 outcome is still relevant to stock performance so i i personally
04:02wouldn't you know ignore them and look forward so if i am now able to beat or even beat the f526
04:09numbers that will be a vote of confidence in my corporate earnings outlook but to your earlier
04:14question of what people are asking about predominantly it is what or which sector can have proper response
04:22to price cuts right because you've seen the initial reaction to stock prices several sectors have
04:27already caught up what next some sectors do i still chase where do i get real world impact
04:36on volumes for companies or what's the elasticity really to price cuts for my companies and that's
04:42the discussion that's the groundwork everybody's trying to do to stay on top of your channel checks
04:46on top of these micro trends in the industry to see which sector stroke companies will now really
04:54start to deliver better outcomes so where is that room for expansion in terms of volumes because if
05:01you just go by what the market is doing right now it seems like everyone's just going to make a
05:06dash the two-wheelers well the discretionary uh as a broader sort of category does intuitively have
05:13greater elasticity to price cuts right more than let's say staples and probably far more than commodities
05:18and we i agree which is the market is also reasonably rational now whether it is two-wheelers whether it is
05:23entry-level cars that's the debate we will have now but a discretionary cohort is conceptually more
05:30uh let's say uh or starts to gain more from the price cuts that we expect will happen how is the
05:37foreign investors now looking at they expected a correction in the valuation to come back into the
05:41market and that's not coming the relative valuations have gotten better that's the point i was making
05:46because global equities have caught up our valuations do not look as bad as they did and more
05:53important is if you now split it into sectors right let's take the financials cohort our banks even in a
05:59slowing economy will still deliver a certain degree of earnings growth with a high degree of confidence
06:03for the next three years but look at what's happened to global financial multiples all global banks have
06:09been on a secular rally this year and if you look at india financials premium to global finance it's
06:15actually come off quite a bit right so in contrast to what's happening the rest of the world our valuations
06:20do not look as prohibitive as they were let's say early 2024 will that lead to money coming in
06:27again it needs a spark i would argue so now when you have rest of em rest of asia doing so well
06:33and people are engaged more in looking for opportunities in markets which have momentum
06:37at the moment there is no real impulse immediately so if the first precondition would be for the rest of
06:43em or rest of asia to lose some momentum before i mean the focus shifts back to india
06:49we've seen momentum going into china you know taiwan vietnam and korea and korea but is there going to be
06:58a reversal from those countries to come back to you i wish i could be so precise to be honest
07:02i wouldn't be sitting here so also my question is also with respect to tech and that's a theme which has come over the
07:13weekend you know the tech has been slow or since last september uh distribution is been falling off
07:19then you know uh trump coming in tariff wars uh you know multiple headwinds for this sector
07:26and the final one coming in with the visa how do you see the tech sector as a whole
07:30i think the development of the weekend is still evolving and we'll figure out exactly the details
07:37of it and do how companies respond to it uh maybe some onshoring is possible but like i said
07:43we do not have enough information here to take a very hard view on this outcome but let me make a
07:48slightly broader comment see what's happening globally is that the whole trade structure the
07:53integrated supply chain is now being dismantled to a degree countries that relied on export or that
08:00trade will lose drivers of growth and growth globally will become more scarce over the next period
08:06few years right india is a country which actually has endogenous growth drivers even though my growth
08:13will likely slow because my linkage to the world is not zero i still have exports and those exports
08:18will likely come under pressure but i am not entirely reliant on it i still have a lot of very strong
08:24domestic growth drivers so the alpha on growth in india structurally for the next three years will
08:29actually improve because countries which are more dependent on exports will actually run out of steam
08:33faster so on a relative basis india will be one of the few large economies which will still have
08:39some visible growth over the next three years so as an investor if you were to make a portfolio
08:44fresh based on this premise about you know the domestic story being so strong on india and lesser
08:50reliance on export oriented economies what should be my biggest sector overweights and underweights
08:56so let me answer that question two ways right uh if you're a three to five year investor you look
09:02for compounding growth so the growth expectations will need to be watered down a little bit right
09:07one because the economy itself is a little bit slower uh just take the stark contrast in nominal gdp growth
09:12it was not of 20 percent f523 it's now probably going to be eight percent and there isn't an in there
09:18isn't a view that this eight is going to 12 very early in a rush it probably goes to nine or ten
09:22over the next three years but we are in a more subdued economic growth activity which will
09:27therefore dampen the earnings growth and therefore possibly equity returns the other argument we make
09:32is that shorter term returns are made on earnings surprises not growth we've done a lot of quant work
09:38on this and if you're an investor for 12 months or less you are looking for companies that are going
09:43to beat expectations of growth right now that appears difficult as well because yes things have
09:51got a right size of the forecast but do i have enough momentum for a large set of companies to
09:56surprise your earnings i don't see that yet so my suggestion is it is still a better asset to own
10:03in the india context especially given the tax structure that we have locally but do not expect a high
10:09double digit compounding return from an india equity portfolio over the next three years
10:13you if i make nine percent in equities in an india index ctf i should be happy with it it's a good return
10:20and what should my sector composition be we prefer financials on that like i said because there is a
10:26high confidence of even let's say subdued growth relative to history and i'm getting these stocks at
10:31a much better valuations relative to what financials are trading elsewhere in the world we like the
10:37consumer space we've talked a lot about it so far uh because there isn't enough of a stimulus
10:42couple of sectors we like on the side is uh we like real estate we like power we like the defense
10:47stocks so we have those idiosyncratic bottom-up picks as well but on a core basis of financial
10:52stroke consumer consumer discretionary makes a lot of sense sanjay uh a lot of new money has not
10:58come into the secondary market but new paper which is coming whether it's ipo whether it's
11:02block deals or pe exists everything do you see this trend to continue in this year as well
11:08must uh because that is the function of market because that's not bringing the momentum in the
11:12secondary market it's just absorbing the liquidity and then uh you know the momentum that needs uh
11:18we don't need to why why should we it is not an imperative right the function of the equity market
11:24is to take savings and provide it to corporates who will use those savings to grow assets right
11:29and the equity market is discharging its function because there is money coming into the mutual funds
11:34or through retail and it is being transferred to corporates through all these listings and ipos
11:38now now some of it is our exits but again that's recycling of capital so what is happening is
11:43exactly what the market is designed to do and as long as there is supply of money there will be a
11:49demand of money if the market has to balance out and the secondary market function where trading
11:54where the fi volumes come in uh in the secondary market as a trading volume that's something which
12:00is much lower uh today compared to maybe a year or two back right in that sense again if you step
12:04back and again we return research on this on a daily basis the flows net flows are zero right
12:09there's as many buyers as many sellers right why does the market go up or down it's on the impulse
12:14of the buyer if the buyer is more aggressive the market goes up if the seller is more aggressive
12:17the market goes up so i think a lot or too much of an excessive focus is is put on this flow analysis
12:26uh if i may be a bit harsh that's like chasing your tail right we cannot invest on the anticipation
12:33of flows we have to invest slightly more fundamentally and like i said the india looks it's much better
12:39in the context of where global equities are today and how does it change your coverage platform because
12:43uh everything in india you know few years that had 80 stocks now 180 160 stocks the expansion of stocks
12:50which are coming in foreigners now looking at more alpha in many new stocks which is there
12:55how does it change your how as a brokerage uh how does you how do you look at that actually
13:01well thank you for the question gives me an opportunity to plug myself a little bit right
13:06because jp morgan has invested a lot in its equity franchise in india a few years ago we were covering
13:12somewhere around 125 over 30 stocks i'm within sort of being 190 stocks uh now uh because the impulse
13:19is right the market is growing the expansion of liquidity is durable it's here to stay and it is
13:24imperative upon me as a brokerage to say competitive we are if i if i remember my number right top three
13:30foreign broking house in terms of stocks covered now uh and there is a clear emphasis from all the
13:36senior management at jp morgan to continue to stay invested in india to grow our investments and
13:41increase our footprints in the economy and india will always be a stock picker's market anyway right
13:46again to be very harsh india used to trade three billion a day in 2019 even though the market's
13:54soft now i'm still trading 12 billion a day there's 200 odd stocks which have fno a lot of liquidity a
13:59lot of hedge fund interest so things have structurally changed the economy will go up it'll go down the
14:04market can be flat and they're not flat but there is a structural change in the size of the equity
14:09market and it is imperative for us as participants to respond to it but this is still here you're
14:15expecting new highs right better than the previous high logically it should go up every year to be
14:21our risk our target is 26 500 and over next 12 months next six five months and you'll have short
14:27term uh peaks coming in uh volatility uh do you because you have couple of events coming in india
14:35us trade and others there's other resolution that comes in that is that going to bring in some kind of
14:41uh you know impulse into the market as you say i do think markets tend to be reverting
14:47so the premise might prove to be correct but again it's impossible to be precise okay
14:51we let you go thanks for your time thank you great thing here thank you
14:55we have with us right now jahangiraziz to talk about what the state of the economy not just for
15:19india but for the world is looking like jahangiraziz welcome to et9 good to meet you in person
15:23what's the world view right now and let's start off with the u.s where is this tariff war going to
15:30head so i think there is a sense in the market that with all of these trade deals let's leave
15:36india side for the time with all of the trade deals there is a sense that the tariff or the trade
15:42war is settled i think it's far from settled so if you look at the tariffs almost all the tariffs
15:49were used uh using the ipad international economic i forgot what ipad stands for that's what the
15:57reciprocal tariffs were that's what fentanyl tariffs were and we have been tracking this
16:01a while saying that there are major legal challenges to it we had one challenge that
16:07was heard by the u.s court of international trade that ruled that the ipad tariffs were illegal
16:13uh that went to the u.s district federal court that upheld the lower court ruling and now it's up
16:20to the supreme court the supreme court is going to hear it in the first week of november it hasn't said
16:25when it'll hear but if the supreme court also oppose the lower court rulings then all of a sudden the
16:31basis of most of the tariffs not all most of the tariffs on all these countries essentially is
16:38are is invalid and then none of i saw the trade deals and then we go back to the drawing board
16:48saying that what are the alternative and and the u.s has alternative ways of reimposing the tariffs but
16:55those ways those those uh avenues that they have the nature of the tariffs will be different
17:02the countries will be different quantum will be different and the sectors will be different
17:09but assuming that there would be tariffs in whatever form or quantum or whatever are we looking at
17:16slower global growth in the times to come yes and i think that what has happened over the last
17:22i would say three quarters uh since the tariff concern started which was back in november last year
17:29i think that is essentially camouflaging is being camouflaged that slowdown is being camouflaged by
17:37several things one is the reaction by u.s corporates to front load uh imports which had a massive impact
17:46on uh the rest of the world include particularly in north asia so that was the first thing the second
17:53thing is that the slowness with which the tariff increases are being passed on to inflation
17:59is because again u.s corporates are absorbing most of the tariff increases uh on their balance sheet right
18:07now on their profit margins there are obviously clear limits to how much you can absorb on your profit
18:12margin sooner or later that will get passed on to consumers we expect that to happen in the fourth
18:19quarter so there you are going to see a spike in inflation and from there on to consumption in the
18:25u.s on the labor market itself the labor market itself is softening and the third bit which is where
18:31i think most of the camouflaging is is that alongside all of the tariff wars completely independent of
18:39the business cycle is the tech cycle the tech cycle is being has nothing to do with the business cycle
18:44right and the tech cycle has been enormously powerful uh u.s capital equipment grew in the
18:51first start by 15.5 percent almost all of it was tech equipment uh you can look at the s&p 500 how
18:59much of the tech companies driving it and as a result you you you have to sort of pass out all of these
19:07three factors and the big call is that how long will this tech cycle last we know that it's not
19:13it's not really related to the cycle but how long will it last so i think there are there are these
19:17three things that are drive that wedge that you know growth has been very strong globally at least
19:24stronger than expected but just because it hasn't happened doesn't mean it won't never will
19:31you know the entire premises has been the huge deficit that u.s is running with trade uh and
19:39this tariff yes has been to get the deficit lower yes what is the kind of impact that you see for the
19:45u.s as a whole there are some figures of 300 million dollars of additional revenues coming for the u.s
19:50do you think that it's going to help in some way to bring down that huge deficit no so the deficit
19:56what happens to the trade deficit and what happens to the tariff this thing etc are two separate things
20:03right so um the different ways of looking at it right um one way of looking at it is to say that
20:11whatever the trade deficit or current account deficit is that's just what u.s needs to borrow from
20:18the outside world to meet its fiscal deficit given what is happening to domestic savings right
20:26so if you have fiscal deficit going up it does it's not going to go up to seven percent if you
20:33believe that all of the four hundred five hundred billion dollars of tariff revenue is going to come
20:37but it's going to go up from around six is six percent to about six and a half percent so you have a
20:43half a percent increase in fiscal deficit in the u.s who's going to fund that uh in the last eight years
20:50no one really ever was concerned about it because it was a reserve currency if fiscal deficit goes up
20:57it's going to be funded by foreign borrowing which means that the current account deficit is going to
21:01widen but now you have an administration that is targeting that too as you rightly pointed out with
21:08the tariffs so whether or not the trade deficit widens or narrows depends entirely on who is going to fund
21:16that half a percentage point of higher fiscal deficit if the domestics are willing to fund that
21:23through higher savings then current account deficit can actually fall but if the domestics are funding
21:30that with higher savings then either consumption or investment or both need to slow that's the only way you
21:37do get higher savings which means growth rate in the u.s is going to slow down so there is no such thing as a free lunch
21:45what happens in india's case because kind of the same story playing out while consumption is getting
21:52that fillip you've got the rbi backing it government etc while trying to propel growth into the economy
21:58but then what happens to capex so look we've been crying about capex and you know hangering about capex
22:06since 2012 corporate investment as a as a share of gdp has been flat lining since 2012 at 12 percent at some point in time we have to give up this thing that
22:20oh this is cyclical reasons you know it's because of you know gst was imposed it was because the banking sector was weak now the banking sector is bad oh it's because of this that and the other you can't have corporate investment
22:34corporate investment flat lining at 12 percent at 13 years and then say this is not structural
22:41it's a structural story it has very little to do with cycles i know we want to believe in green shoots and cycles and every pop up
22:50at gas half full thing 13 years we've been talking about it right at some point in time you need to step back and say look there is something structural about india's corporate sector and that's where i think the debate is
23:03the debate is being not been there it's always been focused in india on what are the cyclical factors what is the
23:10proximate cause and we've always blamed you know now we're going to blame tariffs and external headwinds
23:17uh previously we blamed the banking sector before that we blamed uh the introduction of gst
23:23um i think we're running out of excuses we need to really actually find alternative engines of growth
23:30and the corporate sector is you know flat lining at 12 percent because there are no alternative we haven't identified alternative sources of growth
23:38so what is the solution the solution is that we basically go back and figure out what has been the reason as to why we had this massive increase in corporate investment back in the period 2002 is
23:50back in the period 2002 is to about 2008-9 we had the global financial crisis why did it actually fall in the global financial crisis and why has it has never really picked up it has to do with the corporate corporate uh india not fully buying into the domestic driven or the export sector driven story they have to buy into that idea they haven't
24:17i mean that's only obvious explanation i can i can come up with
24:22consumption in domestic uh and that's uh if you look at uh india as a whole uh we are not so much dependent on export but we have a good domestic story which is going
24:32right so you take investment either in growth rate overall investment or as a share of gdp then take exports growth rate or exports as share of gdp
24:44gdp draw the two lines there is no daylight between the two of them we are exceedingly open economy we just do not we do not want to actually acknowledge that and i think that is one of the answer to your question that is one of the first acknowledgements we have to do literally take investment as a share of gdp take exports as share of gdp basically there is no daylight
25:11there is no daylight we could go on chatting about the word but thank you so much for your time i believe you have to get going
25:18i have to get going and thanks so much thank you so much thank you
25:22you
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