Rajiv Batra, Head of Asia & Co-Head of Global Emerging Markets Equity Strategy, Chief India & ASEAN Equity Strategist, JPMorgan, addresses global investors’ concerns about India’s growth and policy. Investors are closely watching for double-digit growth in earnings and nominal GDP. He suggests profit-taking in pharma due to US generic concerns and underwhelming earnings. Batra is positive on financials and monitors the Jackson Hole Symposium for its impact on rate cuts.
You have debated in the past that India will remain one of those expensive markets in terms of the valuation while the outperformance with respect to the emerging markets right now is still to take place. The other fact is that the FIIs are not finding much interest in the Indian markets. You have been interacting with a lot of global investors. What are the top two questions they are asking about India right now?
Rajiv Batra: The two top questions are always growth, number one, and the second one is what is happening in the policy zone. Each one is getting fully addressed at this juncture. The bigger worry till the end of November last year was how long will this twin policy tightening continue. That question is now fully getting addressed after the Independence Day speech from Prime Minister where we have started talking about GST normalisation.
Monetary policy easing plus fiscal easing in tone is settling down the nerves of foreign investors that India’s policy regime shift has started happening and India is looking at reforms and easing cycle again. As for where the questions still stop, we do not have factual answers to justify right now on growth. Looking at our models, looking at the coming two or three quarters, growth will start reviving. Investors want to see growth is a double-digit handle in earnings terms as well as nominal GDP terms and macro data points are only going up north rather than staying flattish or down. My foreign investors, particularly, if they do not smell a double-digit growth handle on earnings, they will not get warmed up to India story again.
Remember investors never come to India for valuation, they come to India for sustainable earning growth which India provided from 2020 till almost 2024. As this growth started receding in India, that is where the outflow started happening and foreign investors’ ownership kept on coming down on India. Growth and policy are the two key things I am mostly questioned on.
Why not pharma? I understand that the sector itself is trading at expensive valuations, almost 26x PE. But other than that, don’t you believe that the domestic pharma and the generic story will continue to do well, especially healthcare as a segment?
Rajiv Batra: I 100% agree with you. In the whole healthcare space our most preferred space is hospitals where we think there is a structural demand and as India’s GDP per capita and medical insurance penetrations keep on increasing, hospitals should keep on benefiting from a three, five, and ten years kind of lens. In the case of domestic pharma too, issues can emerge more from the US generic related names over Section 232 investigations in which even the pharma sector is included. The big question mark over here is if that overhanging sword is there, do we want to give a higher valuation to this particular space? Should we remain significantly over positioned which I can see from the books of foreign investors as well as the domestic mutual fund investors. Is it not prudent to take profit off the table because we have seen 40% outperformance from this space over the last three-year period?
The way things have panned out for India and most of the sector for the last one year, it is prudent to remain on the sidelines and revisit them once the event gets over. On the top of it, earnings in the quarter concluded have not been that great enough for the pharmacies. It was a kind of a lacklustre or underwhelming performance. Taking that into account, plus Revlimid going off patent over here as such and hence the earning contribution declining from 13% to 1%, makes us a bit concerned about this space. We believe it is the right time to take profit off the table but remain only in selective spaces like some domestic pharma names and hospitals and have an almost zero position on US generics.Of course, the next big event to be watched closely is going to be the Jackson Hole Symposium and Fed Chair Jerome Powell’s speech on that. While you are positive on financials, help us understand what the cascading effect could be back home based on what the commentary is and what are you expecting to hear this time around.
Rajiv Batra: The topic this time in Jackson Hole is quite interesting. It is on the labour and labour supply overall. It will be interesting to watch the final outcome come from there, whether non-farm payroll, which is the most debated topic of discussion over here, whether 100,000 run rate monthly should be considered as the accepted one or it will be brought down to 50,000 as a normalised one over here as such. If the commentary from that side is too hawkish, that will start putting doubts in the minds of the bond investors that come September 17, there should be 50, 25, or no rate cut, and that will have a kind of a risk-off, risk-on impact on the entire global equities. Right now, the market is still highly pricing in a 25 basis point rate cut on September 17th. So, the risk of tone will definitely impact our cyclicals, particularly domestic cyclicals, where we have been seeing people being increasingly positioned over the last three to four months.There is a debate going on the defence pack that a lot of it is already in the price and that the valuations are not that attractive. What is your bull case scenario when it comes to defence because you have been sounding bullish on this space for a while now?
Rajiv Batra: It has been a structural theme for us and we believe this theme will prevail, especially post the recent uncertainty which India has seen during April and May. We believe the incremental investment and capex will keep on growing in this particular sector and on top of it. In the present scenario, everyone is on their own on the global market side and this is the reason why most of the countries are increasing their defence budget and expenditure.
Even then, most of the foreign multinationals and giants who want to expand their wings will try to forge a JV or try to do some mergers and acquisitions in this particular space and these industries can keep on growing as such. For now, taking national security into account plus the global scenario we are in, this is one such sector we should be playing from the next five to ten years’ perspective. People have been contemplating whether there will be delivery in terms of an execution from an Indian defence company plus will the earnings match the valuation that got built up over the last couple of years. Concerns have started receding of late and the foreign investors I have talked to are opening up and even asking whether we believe that the Indian defence industry is trying to get to the global standards.
So taking an overall holistic view on this space, it is better to be overweight or a structural buy on this space rather than trying to play cute and trading in on this space where one day you are overweight and then you go on the sideline. I think that trade may not work. You need to be in this trade for a reasonable amount of time.