Ajay Bagga on Trump’s impact on Indian markets and sector performance

ET now:

Today, it is going to be a crucial day in terms of macro data as the US jobs report is expected tonight. The FOMC meeting showed that policymakers were not in favor of cutting rates, but they signaled that the US economy is on a disinflationary path. What kind of macro signals are you gathering at the moment that can be aligned with the Indian markets as well?

Ajay Bagga:

Overall, if you look at both leading and incidental indicators of the US economy, there is a recession coming. The labor market has softened. Job creation is slowing somewhat and wage growth is also decelerating. Both the ISM numbers, manufacturing as well as services, came in the contraction zone. So, overall, it’s a soft-landing economy, which the Fed wants.

Powell’s latest statement at the ECB seminar was that we can afford to wait. We understand the issue with restrictive policy, but given the strength of the US economy, we can afford to wait. Now, the market is eyeing one rate cut in September with a probability of 70-75% and another rate cut in December. However, Fed speakers and pollsters have been very clear that we need to see a lot of data for several months before going down that path. So, let’s see who is right, be it the market or the Fed. But for now, a rate cut is expected by September.

Another thing is that Trump is widely expected to win the election regardless of who the Democrats put up against him. The momentum seems to have shifted to Trump. “Trump business” has started in the world. Japanese equities do very well; In 2016, in the first few months, the Japanese index was up 30%. When Trump’s anti-Chinese tariffs arrive, the Chinese market reacts.

There will be an outflow from China and an inflow to Japan. Taxes will also be cut slightly, the debt will rise, and immigration will be tightened, thereby tightening the labor supply. This is why US yields have risen after the Biden-Powell debate. It seems likely that Trump will win, which would mean higher borrowing costs, lower taxes and higher debt levels. Trump will be very exciting for trade markets, and we will need to position accordingly.

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ET now:

Also, give us an insight into the budget run-up. We have seen some movement in budget-specific sectors like infrastructure and defence. Jefferies recently noted that the government will strike a balance between fiscal policies and capex due to large dividend and tax hikes. What will you do with this space now? Will these sectors do well? What to expect in the budget run from here?

Ajay Bagga:

The only issue here, as we have discussed earlier with railways and defense stocks, is valuation. I have been spectacularly wrong on this as they have continued to rise even after reaching prices of 50 to 80 times earnings. A sharp movement of money like yesterday’s 400-800 crore block deals in some defense stocks has fueled this growth. There people are allocating money at 58 to 87 times earnings, which doesn’t make fundamental sense. It is more about the promise of future performance in these stocks. I think we will continue to see a meltdown in these stocks leading up to the Budget, with some potential softening post-Budget. These are very good companies, well run, huge order books and excellent execution over many years. The only issue is valuation. From a valuation perspective, we have reduced our exposure to defense and railways, even though they are growth stocks. We are currently looking elsewhere, Power is a good option. Utilities and financials offer a more compelling investment thesis. Defense and railways are central to India’s story, with a lot of import substitution and export growth expected. We have already factored a lot into this. If the valuation were better, it would be a no-brainer. High valuations make me wary of railways and defence.

ET now:

I would also like to get your views on the way the sectors have performed during the week. IT and Pharma have been the biggest gainers, while FMCG and others have also done well but not as much as IT and Pharma. Do you think defensive actions are coming back into play, and will cyclicals take a back seat?

Ajay Bagga:

In all-time high markets, when companies perform as expected, you don’t see significant price increases. However, if there is even a slight disappointment, you will see a sharp decline, as we saw today with a leading private sector bank. With no growth in the quarter, there was a sharp selloff of 4%. Fund managers have defensively allocated money from financials to IT and pharma. IT seems to have bottomed out. Management commentary from large IT companies suggests preparation with an AI playbook and extensive training on generative AI. Indian IT will help convert enablers to provide cost and productivity benefits to end users. Over the next six months to a year, we will see case studies coming in, making it a good time to invest in IT. Pharma has performed well in the last year and is expected to continue. However, the poor management of US FDA audits and repeated observations are significant issues. If companies can invest in compliance, we may see a re-rating. IT and Pharma are clearly defensive, with IT bottoming out and looking to be a good time to invest, with outperformance expected over the next one to two years.