#ElectionsWithNDTVProfit | How will #LokSabhaElection2024 verdict impact markets and economy?
Market experts Nilesh Shah, Hiren Ved and Mark Matthews share their insights and key expectations from new government.
Read all updates #LokSabhaElections2024: https://bit.ly/49KWXCP
Market experts Nilesh Shah, Hiren Ved and Mark Matthews share their insights and key expectations from new government.
Read all updates #LokSabhaElections2024: https://bit.ly/49KWXCP
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TVTranscript
00:00 Thanks so much for tuning into this very special conversation of markets mandate.
00:13 Over the course of the next few weeks, we are going to be dissecting what could the
00:18 possible ramifications of the election verdict be on markets, economy and more.
00:24 On this leg, we are going to talk about the equity markets and risk assets and what could
00:30 there be in store over the course of the next, let's say, five weeks and the next five years
00:36 as the new government gets sworn in.
00:38 And to talk about this, we have with us three very esteemed gentlemen.
00:43 They look at equity markets through various cycles and various elections, both globally
00:47 and locally, Mr. Nilesh Shah, Mr. Hirenveth and Mr. Mark Matthews.
00:50 Gentlemen, all of you, thank you so much for taking the time out and being with us.
00:53 Nilesh, can I start off with you?
00:57 It's a big verdict of sorts, even though some people will argue that the verdict came in
01:01 as early as December.
01:02 And this is merely a formality of who gets elected.
01:06 I would love to think about how are you thinking about the election from one, what could happen
01:11 in the near term?
01:12 Yes.
01:13 And two, what would be a five year, 10 year ramification of the new government coming
01:20 in?
01:21 So today, India is one of the most expensive or highly valued market in the peer group.
01:29 And that confidence to pay higher valuation comes from the fact that everyone believes
01:35 India will be the fastest growing major economy.
01:39 And more importantly, economic growth will also convert into profitability growth for
01:44 corporate India, unlike in many other parts of the world where economic growth didn't
01:49 translate into corporate profit growth.
01:53 So the base fundamental for the market in terms of expectation from the government is
01:59 to continue faster growth, continue higher corporate profitability growth and continue
02:07 best governance.
02:09 Got it.
02:10 Okay.
02:11 So in that, I mean, you know, the conversations can vary from what could happen to the policies
02:21 that have been continuing with an assumption that the current dispensation comes back to
02:25 power and what could be the newer things that would come into place as well, innovative
02:29 things that could come into play as well.
02:31 Are there hopes that you're pencilling in on either of the two ends, Neeraj bhai?
02:35 Undoubtedly, keep on doing the good work like fiscal prudence, like out of box thinking,
02:40 which we saw during COVID time and also keep on improving on things which have not been
02:46 attempted so far.
02:48 For example, farm law reforms, for example, rationalisation of subsidies, for example,
02:55 focus on manufacturing growth.
02:57 Essentially, if we have to summarise India's challenges in one line, about 10 to 15 crore
03:04 people are working in agriculture.
03:07 If they're removed from agriculture, I doubt there will be any material impact on output.
03:12 But if they're employed in services or manufacturing, our growth orbit can change.
03:18 Now, this can't be achieved overnight, but is there a roadmap to achieve this?
03:24 Faster growth, better governance and higher corporate profitability.
03:29 These are the tricots on which markets will be evaluating government's next steps.
03:34 Okay.
03:35 Now, I have a question.
03:36 Mark Matthews may not exactly understand upkeebar, charso par, but Mark, what I'm trying to ask
03:41 Hiren Vaid and then to you is that will the extent of the victory make a difference?
03:45 Upkeebar, charso par, Mark Matthews means can the BJP or the NDA go over 400 seats this
03:51 time?
03:52 So, Hiren, can I come to you?
03:53 Will upkeebar, charso par matter or will the markets be happy with the majority government
03:58 coming into play, enacting the policies the way markets would want them to?
04:05 You know, it's quite interesting.
04:07 I think this government coming with a comfortable majority should do it.
04:14 But maybe in the short run, because to use our stock market or corporate language, there
04:21 is a forward guidance which was given by the Prime Minister of 360 for the BJP and 400
04:27 for the NDA.
04:29 Basically these are the two numbers that everybody will look out for.
04:36 Again, predicting elections and seats is a science in itself.
04:40 I don't think I'm qualified to do that.
04:46 Only thing that I would say is that if somebody of the stature of the Prime Minister has mentioned
04:50 these numbers at the floor of the house, I'm sure that there is a lot of confidence and
04:55 backing in their calculations for him to kind of give a number like that.
05:02 But is it going to be like earth shattering if they get 380 or it could well be 420?
05:08 I really don't think so.
05:10 I think as long as they get a comfortable majority, I think the willingness to do what
05:17 they want to do is there and there should be a fair continuation of policy.
05:23 Okay.
05:25 And Hiren, would the fair continuation of policy be good enough for our markets to sustain
05:31 the valuations?
05:32 And then I'm going to go to the relative valuation question with Mark, but to you in absolute
05:36 terms, we are not cheap, yes, but is that good enough to validate the valuations because
05:42 then the markets will believe that there is policy continuity, hopefully no disruption
05:46 to the earning road trajectory that India has had.
05:49 Will that be good enough?
05:51 So you know, all things being equal, I think when you do good work, right, there is some
05:58 immediate impact, but there is also a far reaching cumulative impact that kicks in.
06:04 Right.
06:05 So I think, for example, what we are seeing in GST revenues today is a result of formalization
06:13 of the economy and better compliance that has not achieved one shot, but it has happened
06:18 over a period of time.
06:21 So my sense is that the continuity itself should create a certain momentum.
06:26 Right.
06:27 So, for example, a lot of private sector CAPEX programs and projects, I think will continue
06:34 to unfold.
06:36 Question is what else can this new government do, which is an unfinished agenda?
06:42 You know, that can only add plus plus to the growth.
06:46 Having said that, you know, the thing about earnings is that something it sometimes it's
06:50 nothing to do with the policy.
06:52 Right.
06:53 Because let's take the example of fiscal 22-23.
06:58 So for example, when the Russia-Ukraine war broke out, commodity prices rallied and companies
07:05 which use commodities saw a hit on their EBITDA margins.
07:11 Right.
07:12 And obviously earnings for the broader market got impacted for a while.
07:16 And all of that reversed in 23-24 as commodity prices normalized and logistics costs normalized.
07:25 So sometimes in the short run, you can't correlate what happens to earnings in a particular year
07:31 to just what the government policy or reforms is.
07:34 Right.
07:35 So sometimes some reforms take a lot of time and how they get realized into corporate profitability
07:43 is a completely different mathematics altogether.
07:46 Yeah.
07:47 Point well taken.
07:48 Point well taken.
07:49 OK.
07:50 Mark, coming on this, I mean, there is this belief that there is policy continuity, government
07:55 continuity, so on and so forth.
07:57 How are you sitting from where you are perched look at what the global view would be on the
08:05 election season in India and the outcome thereof?
08:08 Well, the first thing I'd say is I don't think it's particularly important because unlike,
08:15 say 20 years ago, foreigners don't move the market anymore.
08:19 That's patently obvious in the way the market has performed in the last couple of years
08:24 despite foreign net selling.
08:26 Now, to answer your question, I don't think foreigners do look at Indian politics very
08:32 closely because they're complicated and it's hard to understand them.
08:37 What they know is that this is a pro-government, sorry, pro-business government that has enacted
08:44 some really deep structural reforms, which are unusual to do in a democracy because they
08:52 cause short term pain and that's the way you usually get voted out of office.
08:57 So, I would say they recognize the good work that's been done.
09:03 I don't think many of them know about the potential for further reform.
09:08 They're just happy with what's been done and I think they feel that the momentum from the
09:15 reform that's already been enacted and the plans with the railroads and electrification
09:21 and internet and all those other things, there's still so much room to do good work in those
09:29 areas.
09:30 So, long-winded answer, I don't think foreigners are spending that much time looking at Indian
09:38 politics, but I also don't think that foreigners are the movers of this market anymore anyway.
09:44 Yeah, no, that's a fair point.
09:47 Just before we take that break though, Mark, the consistent opinion that we've gotten from
09:50 everybody that FIIs are probably waiting for the election outcome to happen before they
09:55 commit more money.
09:56 You are saying that is not the case, to your mind.
09:59 Yes, I don't think they are paying much attention to it.
10:03 You know, Indians are always so preoccupied with the budget, for example.
10:07 I can tell you, no foreigner cares about it.
10:10 Sorry.
10:11 Yeah, the budget, I completely agree, but I thought the election was a different kettle
10:14 of fish altogether, Mark.
10:16 You completely decrying that.
10:17 Interesting thought.
10:18 So, we will come back, but while we are trying to talk about the markets mandate and what
10:22 policy could be like, we need to slip into a quick break, Mark, come back and try and
10:26 talk about policy and what it could do as well, because I'm sure that is something that
10:30 some of the foreigners might be looking at and earnings growth, of course, where India
10:33 has kind of scored.
10:34 Mark Matthews, our global guest, is saying that, hey, foreigners are not quite particularly
10:38 perturbed by what could happen.
10:40 So, he's kind of killed the show already, but we'll still try and do the next segment
10:44 to try and just understand what should people still be focusing on per se.
10:48 Now, Nileshbhai, I come to you.
10:51 For the retail investor, as you and Irene were saying before the show as well, has probably
10:55 laid out the ground anyway that we are disciplined, we are staying put, and therefore, if we've
11:00 stayed invested in Indian markets, the election verdict hasn't mattered.
11:04 The skeptic would argue it's not mattered because there has been policy continued in
11:08 2019, and maybe there will be policy continued in 2024.
11:12 What to your mind would be the most important things that you would want to be seen from
11:19 the new government if you are indeed investing for the next five years?
11:22 As you keep on saying, people are investing in mutual funds as well.
11:25 Don't invest for one year or two years or three years.
11:27 Invest for at the very least five years.
11:29 So, one, do everything possible to sustain growth.
11:34 We are now growing between mid-single digit to high-single digit.
11:40 Can we aim to take it to double digit?
11:43 How do you create accelerated growth?
11:46 One, you have to invest.
11:50 Please encourage private entrepreneurs to invest just like government is investing.
11:56 Second, can we improve the productivity of investment?
12:00 Today, you know Gokhale Bridge in Andheri.
12:04 It's just an example of how unproductive we are.
12:08 We have to remove unproductivity and become more productive.
12:11 Third, this investment needs to be funded.
12:14 While there is enough global capital available, can we allocate our domestic resources properly?
12:23 Between FY21 to FY23, Indian savers put 4 lakh crore in mutual fund approximately.
12:30 But they have put 9 lakh crore in currency notes.
12:33 I mean, currency notes does not give any return.
12:37 Why are people investing in currency notes when equity markets would have given 100%
12:42 plus return?
12:43 So, we have to also improve allocation of our savings.
12:46 Finally, there is ease of doing business, ease of doing investment.
12:52 Today, from top-down basis, India is doing wonderful work in getting, let's say, someone
12:57 like Elon Musk and Tesla.
12:59 Fair enough.
13:00 We also have to ensure that our local Elon Musk and Tesla is also encouraged.
13:06 So, how do we sustain this high growth?
13:09 We are the fastest growing major economy.
13:13 But let's not be happy with that.
13:15 Let's target double-digit growth.
13:17 Okay.
13:18 Well, cross fingers for that, Mark.
13:20 Would it take double-digit growth for further interest to come in from the global diaspora?
13:25 Because the headlines are very strong, right, in India.
13:28 Apple being one of the largest production hubs now, starting to emerge as one of the
13:32 largest production hubs, one out of every seven phones made in India.
13:35 Elon Musk and Tesla are coming to India.
13:38 A bunch of others have already come in.
13:39 The global gatherings, when they happen, everybody talks about setting up the next plant in India.
13:45 What is it that you would want to see?
13:48 Well, just to answer the first part of the question first, I think that the issue with
13:58 India is the asset class it is located within.
14:03 Emerging markets has been a pariah, essentially, for 15 years.
14:10 That could change, but I think there's no sign of it changing yet.
14:17 There are two forces that have caused this.
14:19 The first is the digitalization of the world economy, sort of starting with the introduction
14:24 of the iPhone, was massively, proportionately beneficial to the US stock market.
14:32 The second thing is that China has dragged down the emerging market asset class.
14:37 A lot of people who look at these things from afar aren't really able to make distinctions
14:42 between even something like India and China.
14:44 They just group them all as one big emerging market asset class.
14:51 Even if India starts to do things that are even better and different from what it's done
14:55 before, unless you're an emerging market specialist fund manager, and there are a few of those,
15:03 but not many anymore, you probably won't even notice it.
15:08 Sorry to sort of put a downer on it, but I'm just trying to give you the perspective that
15:15 I think exists in general among, for lack of a better word, global investors.
15:21 Right now, it's still very biased toward big cap technology in the United States.
15:28 That's a point well taken.
15:29 I mean, Mark, we love the downers because it's good to get a reality check all the time.
15:33 Therefore, I really appreciate this frankness, but he didn't come in.
15:36 I mean, because there is this whole conversation, right, that Indian money managers are now,
15:41 could they be started to be seen as ex-China EM fund managers as well if they are globally
15:47 managing such stuff?
15:48 And when people like you going to global funds to get in money into India, is there a wider
15:54 acceptance than what it was?
15:55 Mark is right.
15:56 There still needs a long way to go.
15:58 But can what's happening in the policy continuity and the earnings growth in India lead to that
16:04 change sooner rather than later?
16:06 What's your sense there?
16:08 I think one is always grappled with, first of all, there is no one homogeneous foreign
16:15 investor, right?
16:16 There are ETFs, then there are India dedicated managers, there are global managers who allocate
16:23 to India, so on and so forth.
16:25 And each has a certain objective in place.
16:30 I think the, you know, you, I mean, beyond the point, you know, as long as India continues
16:37 to perform, it'll be very difficult for anybody to ignore us, right?
16:45 It's like any company or a stock in, or a sector, for example, if it continues to perform
16:50 and if you don't have exposure, you're forced to look at it.
16:54 I mean, to say that, okay, you know, we will change weights in the index and, you know,
16:58 the foreigners need to look at India with this perspective.
17:01 I think all of that is fine.
17:02 I mean, you know, that will, you know, the structure of global capital cannot be changed
17:07 overnight.
17:09 I think we have to do what is required.
17:13 And I think if we continue to perform, global capital will come in.
17:18 I think one of the other things is that just ease of doing business and continuity in tax
17:23 policy is very important to attract foreign capital.
17:27 I think if we continue to work on that, and a lot of work has been done, but I think if
17:32 we continue our work on just reducing the compliance cost versus not, you know, not
17:42 at the cost of quality compliance, but just reducing the compliance cost and, you know,
17:49 changes that we keep doing, I think that itself can bring in a lot of capital, if you ask
17:54 me.
17:55 Got it.
17:56 So, you mentioned India again, as it came out, spoke about a few promises, some which
18:00 were present continuous and some which are futuristic in nature as well.
18:06 Did you find something which was wherein you would want to see some more moves done and
18:14 which could actually be really attractive?
18:16 Because there are a lot of pockets where India still has some room to go before it catches
18:20 up with the globe.
18:22 I mean, particularly AI, which is, well, maybe some time away, but even others.
18:27 So I think, you know, I have no doubt that in areas of AI and stuff like that, I think,
18:33 you know, Indian services companies are very smart.
18:36 They will catch up.
18:38 Again, two, three areas, and, you know, since you mentioned AI and, you know, since we've
18:44 been talking about renewables and EV, I think one thing which has struck us again and again
18:51 is that rather than relying on duties and quantitative or otherwise restrictions on
19:00 trade, we need to have huge investments in R&D.
19:07 And just like we had the PLI scheme by the government, I think there should be some sort
19:13 of a incentive for Indian companies to spend on R&D across the board, whether it is our
19:21 educational institutions, our research institutions, or private, right?
19:25 Because if you truly want to be competitive, then you have to spend on R&D.
19:30 So I think, yes, manufacturing without R&D is just a cost arbitrage play or a supply
19:37 chain arbitrage play.
19:38 If we really aim to grow at a sustainable pace and become leaders in certain areas,
19:47 I think we need to do a lot more on R&D.
19:52 Obviously, physical infrastructure, I think they've said it very clearly, they will keep
19:57 on doubling down.
19:59 But some of the softer aspects, right?
20:01 So reforms in the judiciary, for example, it shouldn't take five years for a commercial
20:06 case to get solved.
20:08 I mean, that itself can be a big enabler for private and foreign investments to come in,
20:15 right?
20:16 So I think we should now aim, while we continue to do the hard work that we have done in terms
20:21 of building physical infrastructure and more of the infrastructure and make in India, but
20:27 I think it's now time to look at some of the more aspirational aspects, which are more
20:34 foundational like R&D spending, spending on health care, judicial reforms.
20:40 I mean, stuff like that will really go a long way.
20:43 Okay.
20:44 Well, last two questions.
20:45 I'll end with Nilesh, right?
20:46 But before that, Mark, to you, the final question to you, really, and which is, what would you
20:52 have see the policymakers do?
20:57 I mean, for the longest time, it was that should there be steadiness in taxation, you
21:03 know, and could there be policy continuity there?
21:08 Then there was this ease of doing business, which has been long argued.
21:10 We've traveled some distance, still some more to go, I'm sure.
21:14 What is it that you would or your clients would have India do in order to keep it or
21:20 make it more attractive than what it is currently?
21:22 Well, I'll tell you something very boring because you've heard it a million times, but
21:28 judicial reform, which was just mentioned, because that would certainly make the ease
21:33 of doing business better.
21:37 Federal Act, bring those back, that would make huge strides in reducing inefficiencies
21:45 in the food sector.
21:47 And then land reform, so that land which is not being used efficiently can be used efficiently.
21:55 There's so much land in India that's in that situation.
21:58 And the labor reform, and it sounds horrible, but make it easier to let people go for companies
22:04 that employ more than 300 people.
22:07 And so I'm just telling you what you already know, but those are to me the four big things.
22:12 Okay, Mark, and just to follow up there, I'm just repeating this for sake of a better argument
22:19 or for sake of an argument.
22:22 I heard you say that elections will not make as much of a difference to flows per se.
22:27 So you are saying that even if the mandate is as the market believes, and that's one
22:31 hump out of the way, that is not the necessary and the sufficient condition to bring in for
22:37 in flows, other things have to work out, including the EM characterization or rates for that
22:42 to happen.
22:43 Yes, I mean, I'm not saying that's the correct, not saying that's right, but I'm just saying
22:51 that's reality.
22:52 That really to get India back on radar screens in a big way, you'd have to have a major trend
22:59 change in the performance of emerging markets versus developed markets.
23:03 And it could happen.
23:05 It used to happen approximately once every decade.
23:08 You'd have emerging outperformed developed, and then developed would outperform emerging,
23:12 and et cetera, back and forth.
23:14 That was happening basically from the '80s up until I would say 2007, 2008.
23:21 Since then, there's just been one massive streak of underperformance of emerging versus
23:25 developed.
23:26 So if we can get that to change, for sure, people will want to allocate back into emerging.
23:31 And I think India would be right at the top of their list.
23:34 But so far, you have not seen that trend change.
23:37 It was interesting.
23:38 I was looking, Elishbhai, at this note from CLSA, which was talking about how while Korea
23:44 takes the cake for the best EPS growth for the next two years, for the consistency somehow,
23:48 India probably gets rewarded the most.
23:50 And that's why the multiples are so high.
23:52 Final question to you, Elishbhai.
23:54 We've discussed some things that should be wanted, et cetera, and stuff like that.
23:58 Assuming that the government does what it has done in the last five years.
24:01 Let's say you get the first five years for just formation, but the last five years there
24:05 have been policy moves, et cetera.
24:06 Assuming it's more of the same, because it is a difficult thing to get things going as
24:10 well per se in India, do you think that's conducive enough for flows and earnings growth
24:15 to keep market multiples where they are?
24:17 Or would you hope for something more?
24:19 So we get market multiples which are better than others, not only because we are doing
24:25 well, but because others are also scoring self-goals.
24:30 For example, you talked about Korea.
24:32 Now there is a 60% inheritance tax in Korea.
24:37 There's no incentive for Korean entrepreneurs to ensure higher market cap.
24:43 There's very, very relaxed related party transactions in Korea.
24:50 There's virtually no difference between a listed company and unlisted company of the
24:55 entrepreneur.
24:57 As long as they score self-goal on corporate governance and we do well on corporate governance,
25:02 we'll get this valuation.
25:06 The work done by the government is good enough to sustain this valuation in that paradigm.
25:12 But if others start correcting their self-goals and they start copying us, then we need to
25:19 raise the tempo and we should be looking at going double-digit growth.
25:23 And that's not necessarily just for investors, but it is just to continue this journey in
25:29 our Amritkal to become Vixit Bharat.
25:32 If we grow at mid-single digit, high single digit, we will become Vixit Bharat surely,
25:39 but much later than expected.
25:41 If we raise the tempo to double-digit, then we'll reach Vixit Bharat much earlier.
25:46 Well, if somebody's got the ear of the people who matter, the man who just gave the answer
25:51 does.
25:52 Thank you to all of you.
25:53 Thank you so much for taking the time out and being with us on this show and giving
25:56 us your thoughts.
25:57 Mark, all the way from Singapore, thank you so much for joining in.
25:59 And Hiren and Elishbhai, in our studios, special having you.
26:03 Thank you so much for being here today.
26:04 Thank you.
26:05 Thank you.
26:06 And viewers, thanks for tuning in to this broadcast.
26:09 [Music]