Donald Trump has talked of imposing tariff barriers on Indian exports to the US. Will these lead to trade disputes?
India’s goods trade surplus with the US is small compared to… other trade partners in Asia and so it should be less exposed to tariff risks. The Indo-US relationship will likely continue to strengthen post the election and we see US corporates and institutions committing further investments to India in the months ahead. But we do think that the impact will be less significant compared with 2018-19.FPIs pulled $10 billion out of Indian equities in October-frothy valuations or something more structural?
I think it’s a little cyclical. There’s no denying that if you take a look at more recent data, it’s slowed. But just based on the work we’ve done, some of that is a function of a slowdown in government spending. That, in turn, is also cyclicality associated with holidays and festivals as well as rainfall being excessive. So, the recent weakness is transitory.Frankly, if the government was to meet its fiscal budget, spending in the second half of the year is going to grow dramatically. And that should fix a lot of this recent weakness. I agree there has been slightly weaker earnings and the market is pretty fully valued. But India is still super attractive for global investors. They may be taking a few chips off the table to put into China where the big fiscal stimulus should see some uptick. Additionally, China is super cheap and underinvested. We have seen before, when there’s no interest in China, India and Japan do really well in Asia. And the reverse is also true. What’s special about India though is the beta to global flows has come down dramatically because the local flows are such a big part of this market.And it was very interesting to see that the SIP (systematic investment plan) flows haven’t slowed that much. That’s something unique across Asia. Only in Australia, which has a large homegrown superannuation industry, you see something similar. Outside the US, India is probably the only other example where the savings pool is now getting equitised. The recent FPI selling has more to do with growth concerns than with US elections. This should abate as (macro) data improves, which we think it will. This should assuage FPIs and selling could recede.
You don’t see a deep correction?
I really don’t see a deep correction. We have seen 7-8% over the last month–I think that’s reasonable. But the trendline I think is positive. I really don’t see a deep 20-30% correction. The macro variables–fiscal deficit, current account, inflation, leverage, are pretty solid. Are there meaningful excesses in pockets? Maybe, but that is not on a systemic basis. The backdrop for growth and development is actually pretty sound. In India, the average return on equity is about 17%-a 10-or-15-year high. Businesses are actually well run and operate in a very efficient manner with margin expansion over the last couple of years and have been generating returns that are actually world class.
You had a thriving private equity practice in India
We are going to grow. Our private equity business was part of a regional private equity fund. We’re now changing that. We are going to drive our private equity effort in Asia out of India. And we see, certainly in Asia, the most significant opportunity in private equity investing being in India.The fund is going to be principally investing in India with an option to invest in other places. The earlier fund, which we are winding down, was a fund that, frankly, was for the most part a China-led effort, and then invested in other markets, including India.How big will this fund be?
I don’t know-it really is a function of how much money we can raise. But the intent would be for it to be a reasonable size. When we do these funds, we’d like to do a minimum of $500 million to $1 billion.
Across pools of global and institutional capital, what’s your sense of the investor outlook on India?
For private equity, outside of the US, the two main markets for global private equity funds are India and Japan. It’s the same for sovereign wealth funds and they are very focused on putting capital to work over here. The question is not so much how much capital I want to put but how much capital can I deploy at prices that are reasonable. What is also changing is finally India is showing that exits via public markets are possible–75% of our IPO pipeline is PE portfolio companies, so that’s pretty special.In the public markets, there is a passive piece. I think India’s weight in global indices like MSCI has gone up and will just continue to go up as market capitalisation and free floats increase. So that will lead to more money coming in. However, discretionary capital will go in and out and will be driven by valuations and relative market opportunities. Frankly, from a regulatory perspective, India is still not the easiest place in the world for a fund to actually operate.
