Is the worst of the foreign investor selling in India over?
Over the last couple of quarters, Indian equities have had a more difficult time, largely driven by things beyond India’s control. One is the AI super boom, and two is the conflicts in the region and the consequent energy shock. Energy prices have come all the way back down, and oil supply looks quite abundant globally. So, for India, that is good news. India is very close to the top of the list, and you could see a continuation of foreign flow back into India, creating a so-called virtuous circle.
After two years of underperformance, are Indian stock market valuations still expensive right now?India’s premium has almost entirely disappeared now. So the valuation is more reasonable versus other emerging markets. When we look forward over the next six or 12 months, we can have more confidence in the earnings forecast. That is quite encouraging for Indian equities.
Where does India sit in your emerging markets basket?
We are neutral on emerging market equities. Neutral is not bearish; it means fully invested. We want to take a little bit of profit in some of the AI super boom. It’s not that we are negative on Taiwan and Korea.So, we are taking emerging market equity to neutral within that mix tactically, and for India, I am turning a little bit more constructive. Within the mix, the relative preference is adjusting more in the direction of Indian equities on the tactical side in the next six months.What is your assessment of the sharp sell-off in Indian IT stocks?We will have to wait and see. We call it scarcity and abundance. People are hoping that AI can create an abundant future, but we are not there yet, so we need to treat the world as it is.
There is not much evidence of the impact on jobs, and the US labour market continues to be very strong. For now, it feels the market has a little bit oversold indiscriminately. AI is a big deal, we agree with that. But the skill as an investor is to be more nuanced, to pick your spots.
US bond yields have risen 4.3% to 4.4% with markets expecting the new Fed chair to be hawkish. What will be the interest rate trajectory there?
The Fed is not going to do much is our judgment, because all of us are wrestling with a very complicated world. Their uncertainty and reluctance to move policy is completely reasonable, given a very uncertain path of inflation, growth and unemployment. So the Fed will be on pause for this year, trying to work out what is going on, including the impact of AI.
The uncertainty around inflation is very high, so we think US 10-year yields can go higher, even when the Fed is waiting and seeing.
What does higher US bond yields mean for the AI investment story?The 10-year yields can go up, and AI trade can continue. We are underweight in US government bonds, long duration, and overweight US equities. The reason is earnings.
Do you see signs of an AI bubble?We think the AI boom will continue. This should mean we have earnings strong enough to drive these companies and the overall market forward, even as the 10-year yield goes a little bit higher over the next six months.
