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00:00Thanks for tuning in to today's Talking Point. I'm your host, Neeraj Shah. Our guest today
00:14is Jeetu Panjabi of EM Capital Advisors. Jeetu, great having you. Thanks for joining in.
00:18Thank you very much. Thank you for hosting me.
00:20You know, it's been a long time. I mean, it's been, what, maybe 18 months since we last
00:24spoke. Now, Jeetu, when we last spoke, which was probably March or April 2023, right? You
00:31were structurally skittish, cyclically constructive, if I got that right.
00:37Absolutely right.
00:38Right?
00:39Yeah.
00:40What's changed from then and now?
00:41So, you know, if you look back at the last 18 months, we've had a really good 18 months.
00:46We've seen liquidity turn positively. We've seen a lot of countries do really well. And
00:52markets have been raging. I think we're at an inflection point where this is about to
00:58change, right? So we've been in a high return, low volatility market. I think that is just
01:08reversed. The next six to nine months, we're going to be in a low return, high volatility
01:12market. If you ask me, put a gun to my head and say, what do I think markets do globally
01:17next six to nine months? My best guess, zero return, probably plus to minus five with huge
01:25volatility, huge volatility. Second dimension on the market that's changed is we've been
01:31in a top-down market. So like in places like India, you've had themes like railways and
01:35defense and a lot of other, you know, short financials, for example. I think the market
01:42moves to a bottom-up market. Within the environment, you will have, within a sector, you'll have
01:47five companies that do well and three that don't. And you're in cherry-picking zone.
01:51You've got to go and pick the right company. You've got to make sure the company does it
01:55right. And just a top-down call is going to be much tougher to make. So I think this is
01:59really what's changed. And, you know, you've got to change the game where the market changes.
02:05It seems a bit counterintuitive, Jeetu, in that, that we're talking of the U.S. economy
02:10being in a Goldilocks scenario, India being one of the few, and maybe you were talking
02:16about this from a global market perspective, but still, U.S. doing OK. We are at the start
02:21of an easing cycle. China has done some moves as well to revive growth. So global GDP may
02:27not look as bad over the next 12 months as people might have feared it to be. And you're
02:32saying that we will not have returns at all. Yeah. So I think, well, there are two dimensions
02:36to it, right? One, I very respectfully disagree that the world is in a good shape. I think
02:43U.S. is in a very difficult shape. We saw the consumer confidence data collapse in the
02:49last month's print. We've seen Chinese profit data collapse, 18 percent fall in Chinese
02:55profits after a huge collapse for many years. So my point, if I look at Europe, if I see
03:01the advisories that have come out of the large European autos, everyone is saying we were
03:08expecting 2 percent growth. Now we're going to be down five or seven or nine percent.
03:13And two, the profits are going to collapse. I don't think this is in market horizons.
03:17If I see what the markets are saying, I think there's a disagreement between what the markets
03:21are saying and where I think the world is heading. It is where I'm coming in and saying
03:26I think the global economy looks really, really difficult. Data will show you in the next
03:32six months that things don't look good. The rate cut was clearly needed. Maybe 50 is not
03:39enough. Maybe you need another 50 by December. I think you saw the Swiss National Bank yesterday
03:44cut. I think you're going to have a synchronous rate cut cycle globally, including India by
03:51the end of the year. And I think you're at a point where all this is needed. Now, why
03:54do you cut? Because things are bad. Things aren't good. And you're going to see it in
03:58the numbers. So on one side, you'll have fundamental numbers going down. The other
04:05side, you'll have liquidity going up. There's a push and a pull. Markets are overvalued
04:09globally, especially the U.S. And you'll see the push and the pull result in high volatility.
04:17And flat markets is my best guess.
04:20Okay. So I completely agree. But what I meant to ask was that we know that the world growth
04:25numbers, save for maybe U.S. and you said you disagree, but let's assume that some people
04:30believe that that number is still looking okay. And a few of the markets looking okay.
04:34So growth is, I'm not disputing on that on growth, but you don't believe that markets
04:38can still deliver positive returns in an easing cycle. You don't think that will happen. Central
04:43banks have moved the markets since the COVID lows. You don't think.
04:47So if the valuations were not where they were, I would agree with you. I don't think the
04:53valuations are models. And these are 30, 40 year models are saying valuations are stretched.
05:00Can liquidity still push it up? Can there be other stuff happening? Possible. But I
05:05think it's going to be a lot tougher. And the numbers are just not going to look good.
05:09They're just not pricing in what the real world is doing. In my view, the last two months,
05:13the high frequency data in the last two months is much worse, especially in Europe than most
05:20people expect.
05:22Which is where I'll invoke in the second half of our conversation, what does it mean for
05:25Indian companies which are outward facing versus domestic facing as well? And can India
05:30be slightly different? But just before I come to India, Jeetu, a word on China, because
05:33I know you look at that very, very closely, the data coming from there and the implications
05:38thereof. China has made some serious changes to what it has been doing for the last 12
05:43months, in the last two months, and especially in the last few days as well. What do you
05:48make of all the moves that have happened in China and the resultant implications on
05:55commodities and on other economies, if you will?
05:59Okay, this is a great question. I've been watching China for almost 24-25 years as an
06:06analyst and been continuing to do that. The last seven weeks, China's completely changed
06:13tact, completely.
06:14Please explain.
06:15And I don't think markets, some markets have recognized it, but I think the policy side
06:23needs to recognize it too. So let me explain, right? 18 months, March 23 through July 24,
06:31China followed a policy of easy effects and tight money. So essentially, they let the
06:35currency go down, and they neutralized the pain on inflation and anything else by using
06:43monetary policy. Since July 26 or 27, the FX appreciation game started. The Chinese
06:50yuan is more than 4.5% up since. And this is a big change, a huge change to do in seven
06:57weeks. And what you normally do is when you have an FX tightening, you do a monetary easing,
07:03and they started the monetary easing last week, right? So you can see two legs happening,
07:07the entire change happening. I see other countries haven't done the same. So do I think India's
07:12behind the curve on this? Yes. Do I think Governor Das is going to look at this and
07:17say, yes, he needs to be following the same trajectory? I think so.
07:22Okay. So, okay. Let me just squeeze in that question, and then I come back to the Chinese
07:26impact. But you reckon that by virtue of the fact that US easing cycle has begun, and that
07:33is to a lot of people, a bit of a trigger as well for India, and the fact that China
07:39has done this leads to an October policy change? I don't know whether it's October
07:45or December. In my humble opinion, you need to ease liquidity first before you cut rates.
07:54So all the interventions in the FX markets needs to pause. You need the rupee to appreciate
08:00at least a percent or two. And then you need, because you have a problem of deposits in
08:06the system. So unless liquidity flows into the system and flushes the system, a rate
08:11cut might create other problems, and you need to do that. But essentially, if we're sitting
08:16six months from now, there has to be a significant easing cycle, and RBI knows what best to do.
08:23You know, first, second, third, all that, they understand that well.
08:26I'm sure they do. Okay. Okay, Gitu, coming back to China, sorry, because I want to understand
08:31that. Now that there is a move that has happened, and people have been crying for months about
08:35how China is not making any kind of policy move. They've made a move. There has been
08:40a resultant impact in that the Chinese markets have done well, metals and commodities have
08:44done well, save for crude, but industrial metals have done really well. What happens
08:49next? Now that the first signs of the move have come, there might be more things that
08:54might happen, assuming that those happen as well. How do you see Chinese markets? How
09:00do you see commodity markets? And the resultant impact of what China does in other markets
09:05happening over the next two months? Okay. So, you know, let's first understand what's
09:09the problem in China. A lot of problems in China are structural, right? You have a policy
09:13leadership that has issues of its own. There are battles within that. Two, the real estate
09:20sector has huge oversupply. Digesting that and cleaning up the system and the deflation
09:27that's ensuing is a significant structural problem. It's going to take five, seven years
09:31to solve. And the third, the collateral damage on the household balance sheet and confidence
09:35isn't going away. So the point is, and then on top of that, you have an export chain,
09:40in my view, which is going to see much more pressure in the coming quarter or two. And
09:45the only way you can do is throw more money into the system, create more domestic demand
09:51and try and neutralize that pain. Now that's what I can see they're visibly doing, right?
09:57The 4% move on the FX, plus monetary easing, and they're hopefully kind of buffer the
10:02downturn, the pressure on the downside, right? How does this play out on your commodity markets?
10:10In my view, the demand is still very, very weak. Is the real estate sector going to structurally
10:16turn? The answer is no. Is there a big upside there? The answer is no. Is commodities going
10:20to be exported the hell out of globally? Yes, they're doing it. Is the world in great shape
10:26to absorb that? I don't think so. So this commodity move is a financial market move,
10:31in my humble opinion. Do I see volume changing in a big hurry? I don't think so. And it just
10:37wobbles around, and which is where I come into the high volatility market zone, right?
10:42So all of this, the pushes and the pulls of liquidity and real demand are going to create
10:48high volatility. Do we end at the same price six or nine months from now? Very possible.
10:54The only antidote to this, or the antithesis to this, is if liquidity really picks up, right?
11:01And there are, I mean, one argument that I got at the recent JP Morgan conference,
11:05which a few people made G2, was this, that there are funds sitting, which are sitting pretty at the
11:125.25 rate, or higher than that, in fixed income US treasuries, which as the rate easing cycle begins,
11:21will move searching for greener pastures, because they don't want that number. They want a higher
11:26number. They don't want the 4% number, or 3, 4.5% number, or even a 4.75% number. And if that
11:32liquidity were to find its way into emerging markets, as you could argue traditionally has
11:38happened, could that keep markets afloat, or maybe even more inflated?
11:46So when your typical rate cut cycles, money is going to come into EM, okay? We're not debating
11:50that. Does that happen this time around? I think so. Is that what creates the positivity? Yes.
11:56Are domestic flows going to create positivity? Yes. Is the supply side heavy? Yes. But valuations
12:03are stretched. At some point, someone's going to walk. And so can markets be 5%, 7% higher,
12:10six or nine months out? Absolutely. But do you kind of see the geopolitical side just cracking
12:17globally? Is that a possible risk factor where the winds change and people get scared and run?
12:23Possible. I don't know. So I'm saying there are a lot of factors. Could the reverse happen,
12:26Jeetu? If there's a Trump presidency, if there is a pause in the wars across, right? Because
12:31the world has learned to live with geopolitical conflicts. I mean, the crude behavior is a sign
12:36that geopolitics doesn't seem to be worrying the world anymore. So your words to God's ears,
12:41I hope. I think seeing such large human loss is not good. Markets aside, I think, yes,
12:53markets would be pleasantly surprised if that happens. But again, all my models are saying
12:59the valuations are stretched. Businesses are not doing well. In fact, I'll just make one point.
13:04There are three places in the world in a very weak global economic environment that seem to
13:11be doing well, right? Japan, India, and Spain. Do I understand exactly what's going on in Spain?
13:19Not enough. But the point is there are three places out of 43 markets in our models that
13:25look decent, and the rest are really, really bad shape. In my view, their air pockets not yet hit
13:34the results data, and we're going to see really lousy numbers going forward.
13:39Yeah, that's the other thing though. And just before we come to that,
13:44Jeetu, just wondering, so is this where you are at, for lack of a better word, loggerheads with
13:52the common market wisdom that when the numbers start coming in, the world will wake up and smell
13:57coffee? Or is it somewhere else? No, I think this is one big piece, right? The fact that valuations
14:07are high, and the numbers are going to be much lower than what markets think. I think that's one
14:11area where I disagree with the markets. Can liquidity prove me wrong? Absolutely. Am I going
14:17to be humble enough to change my view and say, yes, there's an economic cycle that bottoms in
14:22March 25 and turns, and we're going to be looking great in December 25, and I'm going to price it
14:27through liquidity now. I could be wrong, and I'm happy to prove wrong in that scenario. But you
14:33need to understand that this is what the milestones look like. You can jump a few
14:37milestones and go out 18 months out, but I'm not so aggressive. I'm a little cautious right now
14:45saying we've had a good run. Year-to-date numbers in the US, 16%, right? Normative numbers are 8%,
14:519%. And with the data not looking that good. Every rate cut cycle is a reason
14:59because the economy is not good. Companies are not doing well. The consumers are hurting,
15:03and you need to cut rates. And that's what's happening. So how do you play India in such
15:07a scenario? So in my view, India's had a phenomenal run. Phenomenal run. I mean,
15:17watching markets for 30 years, this is a huge froth in a lot of small markets, parts of the
15:23market, the SME market and other parts of market. Markets are really frothy, really frothy, right?
15:29As I see it. How do you play this? In my view, the one big difference you make is global cyclicals.
15:36You need to be extremely cautious and domestic driven parts of the market. You need to be
15:42constructive. That's one big thesis. Second thing, what do I expect? I think liquidity
15:47gets much better. Now, what was the malaise of the banking system for the last 12 months?
15:51Liquidity was really tight. When that eases, there's more deposits that go into the banking
15:57system. The banking system starts lubricating faster. Growth comes back. Banks have been the
16:03cheapest they've been in a long, long time. So do I think banks do well over the next six, nine
16:08months? Yes. And I think the domestic side still has some legs to it. Hopefully that turn, but I'd
16:14be very, very cautious on the global cyclicals. Okay. Before I come to global cyclicals, because
16:19you mentioned banks, is the investing, I know Jeetu Punjabi is a guy who invests for growth.
16:25I'm hearing Jeetu Punjabi talk about banks from a valuation perspective, not from a growth
16:29perspective. Why is that? No, I think, so when I see, you know, also, let me, that hasn't changed.
16:38The fundamental growth investing hasn't changed. We're seeing huge opportunity in a lot of sectors
16:45where there's entrepreneurship raging. Okay. You see the air conditioning, manufacturing with
16:51PLIs. You see the EMS stuff. You see a lot of smaller companies doing, you know, companies
16:57doing dredging, companies doing other stuff. All of that continues, and that's driven by
17:01entrepreneurship, that's driven by energy, that's driven by domestic demand, that's driven by policy
17:07being supportive, and that's driven by Indian economy growing and doing well. None of that
17:11changes. Got it. Okay. What I'm saying is, you know, when you're looking from a big asset
17:16allocation standpoint and thinking, what do I do? I think the easy one is financials. Okay. Well,
17:22low hanging fruit, the low ball, if you will. Okay. Yeah. Okay. Do you sense, I mean,
17:27that the financials, if the financials have to make money, the money will be made by valuation
17:33repricing as opposed to growth? Because if everything that we're talking about is something
17:39that even entrepreneurs identify with, then the much awaited private capex cycle might just take
17:46that much longer to kickstart. In fact, also on that point, Jitu, would love to understand from
17:53you. There's a lot of voices that we picked up at the JP Morgan investor conference again,
17:58that if indeed tariffs come about, then China dumps its goods, which it was sending to US,
18:05to Europe, et cetera, and stuff like that. But if that gets curtailed, it goes into the EM and
18:09the Asia pack, and it deflates the end product prices in areas where Indian manufacturers might
18:17have wanted to step up capacity. So is the private capex cycle under a bit of question mark in the
18:25very near term? So, you know, when you look at the macro data and try to look for the private
18:30capex cycle, the answer is what you're saying. Okay. It's coming, not yet come. Yeah, exactly.
18:36But if I go down to the companies we're looking at closely and say, what are they doing in terms
18:41of capex? Are they putting money on the table? The answer is yes. Are they putting it in very
18:47capex intensive industries? The answer is no. Are they doing it where India has a demand side
18:54and not enough of a supply side to be met? The answer is yes. So when I look at the macro data,
18:59I kind of say, oh, the capex cycle is still not here. When I go and see the operating companies,
19:04they're saying, oh, we're adding capacity. We need capacity. We're adding capacity.
19:07Do you think the global cyclical commodities, which are fungible globally, like steel and
19:14other stuff, are you going to see pressure points there? I think there are pressure points,
19:17but India is adding capacity there too. So the answer is somewhere in between that the macro
19:23data is showing you that it's taking some time, but certain businesses and certain industries,
19:27it's happening as of yesterday. Okay. Okay. Which themes? Because I heard you say that
19:33dredging some might be there. But where is it that you see business confidence being very high
19:42or high? So, you know, you look at the manufacturing side. Okay. Very wide bucket.
19:49You look at the air conditioning and electronic manufacturing side.
19:53Okay. 10 years ago, how many O2Us were made out of India from China? You know,
20:00India, the market size is 20 million units. One factory in China was 20 million units.
20:05Right. Today you're seeing the capacity in India has come up to 30, 35 million units.
20:10It's all happened in six, seven years. Are you going to see that scale up? Did you see that
20:13scale up coming? I don't think so. Was there a bit of government help? Yes. Were there PLIs in
20:18place? Yes. Do I see each of the large international OEs taking a PLI and setting
20:24up manufacturing here? Yes. Are there suppliers into that manufacturing chain? Yes. Are there
20:29opportunities to find and invest alongside? Absolutely. That's what I'm saying. So there
20:34are chains, there are food chains in the industrial side and manufacturing side where we
20:38see huge opportunity. Got it. Even in the solar side, right? So yeah, the polysilicon, the
20:44polysilicon companies, the top two, three companies in polysilicon in China are hurting.
20:51Their profits are really hurt. They're trading at 0.2 times, 0.3 times book value. It's like
20:57death over there, right? And here you're seeing a completely opposite picture. But are you seeing
21:01Indian companies who are executing on the Indian solar dream and growing at 100, 150%
21:08per annum? Are they doing well? Yes. So you've kind of found that the government has helped
21:13ensure these guys stay alive, do well, use the pain in China, get the stuff in and then slowly
21:19integrate and build greater capacities. It's going to take some time, but it's happening.
21:24Okay. So manufacturing is your favorite. Just one quick question before, the last couple of
21:29questions maybe. One is, I heard you say that global cyclicals are at a void. What about IT
21:33services? How do they fare? I don't have a strong view. When I see the advisories coming out of
21:42the big guys globally, it kind of is nervous. When I see the hiring data coming out of the,
21:50you know, Google's and Amazon's and Facebook's, it's telling you things are hurting. Have you
21:55seen a change over there? So once they start hiring, you know, that this scale is going to
21:59get faster. But I think people are nervous and I'm supportive of that saying, let's wait.
22:08Let the global economy turn. It's going to take six or nine months. My starting point is the world
22:15is not in good shape. The data is going to show it in the next three, six months.
22:20Once you're somewhere near the bottom, you have a business cycle bottom, you have a market cycle
22:25bottom. That'd be the time to get in. But the bottoms now could be a lot quicker to arrive at.
22:30You believe this could happen in the next six to nine months and then the cyclical recovery or
22:34cyclical recovery would come back as well. Let's wait for the data. I mean, at this point,
22:40I can see there's downside that's not priced in. Let's wait for a bit of pain and then we talk
22:47about the upside after that. One last question. Can the pain in India be exacerbated by the
22:52valuations that we are trading at or is the wall of liquidity going to ensure that the dips are
22:59not so large? I'd lean on the latter. The fact that there's two lakh crores of liquidity
23:08with the mutual funds, there's a lot of money coming in every day.
23:12Is that going to buffer some of the pain if possible? Yes. But when let's say a company
23:20reports a 50% fall in earnings, that company's toast. So I'm going back to saying this is a
23:26bottom up market over the next six to nine months. Focus on your companies. There'll be some guys
23:31who do really well. Some guys do really badly. Focus on your companies. Focus on who's doing
23:36well within a sector as well. Perfect. Execution is going to be tougher and be careful about certain
23:42sectors. Got it. Jiddu, thank you so much for taking the time out and being with us on Talking
23:46Point today. Appreciate it. Thank you. The pleasure was ours. Viewers, thanks for tuning in.