US Election 2024: Elected Government Faces Balancing Act With India, China, Says Sridhar Sivaram
Sridhar Sivaram, investment director at Enam Holdings, highlights the US's need for balanced relations with India and China post-election, focusing on implications for pharmaceuticals and tech.
The United States faces a delicate balancing act when it comes to its relations with both India and China, according to Sridhar Sivaram, investment director at Enam Holdings Ltd. Regardless of which side wins the political battle in the US, it may not necessarily spell disaster for India, he said.
The broader takeaway, according to Sivaram, is that Washington must avoid antagonizing both the Asian giants, as they both play crucial roles in global trade and geopolitics.
The potential political shifts in Washington may have ripple effects on sectors, especially in areas like pharmaceuticals, Sivaram told NDTV Profit. A Republican administration could spell trouble for the big pharmaceutical companies, which could inadvertently benefit India’s generic drug manufacturers. If bigpharma faces restrictions or regulatory pressure, it could open up opportunities for India, as the generics market might boom, Sivaram said.
While the Indian IT stocks seem to be thriving in the short term, the larger beneficiary for the sector is the rise of artificial intelligence, said Sivaram. AI could have far-reaching implications for Indian tech companies, especially those in outsourcing and software development. The rapid adoption of AI technologies globally could either disrupt or transform business models in the tech space.
AI is likely to have a much larger effect on Indian tech than any immediate political shift, Sivaram said, referring to the need for Indian companies to evolve quickly to stay competitive in an increasingly automated world.
Turning his attention to US fiscal policies, Sivaram compared the likely outcomes under different political administrations. With Kamala Harris in power, fiscal policies could lead to smaller deficits, while a Trump administration may result in larger budget shortfalls. Regardless of who wins, Sivaram is concerned that both paths will lead to ballooning national debt, which could fuel inflation.
Emerging markets, once seen as high-return asset classes, are losing their appeal, according to Sivaram. Investors have become increasingly disillusioned with the returns from these markets, particularly in the context of the rising risks and geopolitical instability. "Emerging markets just aren't delivering the kind of returns investors are expecting," he said.
Foreign institutional investors are pulling back from these markets, further exacerbating the situation, said Sivaram. "If you're allocating a significant portion of your portfolio to emerging markets and not seeing returns, the question becomes, 'What's the point?'".
Looking ahead to the next quarter, Sivaram forecasts significant challenges for the financial sector, particularly for non-banking financial companies, microfinance institutions, and small finance banks. These segments are likely to face massive earnings downgrades, with the upcoming quarter expected to be particularly painful. "I think the next quarter is going to be a disaster for many of these financial institutions," he said.
Conversely, Sivaram maintains that large banks are better equipped to withstand the current financial challenges. "The larger banks seem like a very safe bet right now."
Watch The Whole Conversation Here
Here Are The Excerpts
The idea of getting you today was this because we kind of wanted to talk to you about what the implications of something like this could mean for trade, rates, flows and a lot more. But is this a surprise to markets, because they seem to be really rejoicing a Red victory ever since last night?
Sridhar Svaram: Yes. one, I think the final results, I don't think we are going to get even by the end of today. So this is going to go on for maybe till tomorrow, till we get something final. But broadly, I think markets generally are more positive with Trump, because he's pro-business, and in terms of taxes, you know, his tax policies are a bit more favourable than Harris, and the scare of capital gains taxation on unrealised gains.
I mean, those are really small things, but from a market standpoint, it seems like Trump is more favourable than Harris. But if you look at the broad policy level, we've seen four years of Trump and we've seen four years of Biden. They weren’t very different. I mean, one would have thought that, you know, a lot of the tariffs Trump had imposed on China would get reversed. Nothing like that happened. In fact, more tariffs came even during the Biden regime. So I think, from a broad policy standpoint, I think they aren't very different. Honestly, it doesn't make too much of a difference.
From an India-US relationship as well, a few chinks here, and they're not withstanding. The last four years of the Democrat's power in the US also had some fairly strong outreaches to India on multiple factors. Would you reckon that both are coming out? I mean, either coming out is not going to be a negative for India?
Sridhar Sivaram: I think it comes from the fact that their stance on China is a bit more, I would say, very firm in terms of the tariffs on either side. So then they cannot be antagonising both India and China. So, I think, all the policies of India also are not exactly that the US likes, like our relationship with Russia is not something that the US is very happy about. But the fact is that they cannot antagonise both India and China, at least that's the broad field you get.
So, India is in the right place at the right time, so I think it's broadly positive from that standpoint. I mean, the other important data that I recently came across is that the largest exporter to the U.S now is no longer China, it's actually Mexico. So almost close to $500 billion and that is happening because Chinese firms have put up their capacity in Mexico to bypass the tariffs. I think that may get affected if Trump comes, and that's positive for India again, because they bypass the tariffs, and Mexico becomes the hub for manufacturing. It's really not manufacturing, it's assembling. Those are the positives, the second derivative positives that India may get if those tariffs are imposed. Complicated, but I think there are a lot of wheels within the wheels.
I'll come to the easy wheels in a bit. But since you brought this, I'm just trying to understand, maybe it's early days, but there are thoughts around and all of this is a hypothesis, right? One, it's a hypothesis that it is the Republicans who come back to power as of now, it is a hypothesis, even though the numbers look in that favour.
But this will change, as Sridhar Sivaram said, but working with that hypothesis that if indeed it is a Republican Party coming to power, have you done some work about potential investing implications of this sectorally, I'll come to the micro first that I want your view on rates and flows as well, but I'll start with the micro first, since you brought this up as well. Have you done some work, or is it not really worth the time to spend about what could happen, and therefore try and take investment bets accordingly?
Sridhar Sivaram: So I think one sector, if Republicans come, which will get affected, in my view, very badly, is Big Pharma, and this is thanks to all the documents and speeches that RFK Jr has made because he's been a big proponent of transparency in Big Pharma, and we haven't had that for many years, and we've seen that during Covid times also. If that happens, and a lot of the easy approvals that Big Pharma has been getting without getting proper safety data, I think that looks I mean, I don't even have to say, I think if Republicans come, you'll see what happens to Big Pharma, because it's very well documented in the U.S.
So I think that's one which, again, may help India, because some of the genetics will come into play, because some of these drugs are new drugs, which seem to be giving better efficacy than some of the older drugs, but may not have the same safety data, but we'll have to wait how this plays out. But I think that's a sector which gets impacted, but it doesn't affect India that much.
Okay, fair call. The belief again, just one last micro question, and the Tech Index is rejoicing today, 2.5% up for Indian IT. Now, what gives here? Is it a belief that corporate taxes go down, therefore corporates will spend more, and therefore Indian IT companies do this or what is it?
Sridhar Sivaram: I think it's in thinking in those lines. But I think it's a bit far-fetched. I think AI is affecting Indian tech more than any of all this. So, I think if more AI is implemented, it's far easier to do the lower-end jobs, because, you know, AI can do data analytics much faster than, you know, humans.
So I think that affects more. But I think it's in those lines that discretionary spending goes up, and that has been one of the issues, that discretionary spending by corporates has gone down as a result, that it has impacted I.T. spending.
One of the thoughts, also Sridhar, that came out in the last 15-20 days was that a potential Trump victory would be reflationary. Would mean that inflation perks up again, because all his policies are kind of pointing towards that, and therefore, the rate cut trajectory that was perceived to be in place with lower inflation in the U.S might get reversed and some people argue that we might even see higher rates and higher inflation numbers in 2025 in the U.S. Therefore, would that mean that flows which are perceived to be flowing into Emerging markets and India from the U.S, with an over rate cycle, would actually now go back?
Sridhar Sivaram: So, my view is, either side is going to be inflationary, because I'm not seeing either policy being fiscally prudent. So, if you look at the fiscal policies of either side, you can argue that, you know, the Harris side fiscal deficit goes up by a lesser amount and Trump by a larger amount. Either way, if your deficits are going to balloon, it eventually becomes inflationary. So, I'm actually not in the camp that the inflation demon has been conquered. It will come back again if these sorts of policies continue.
The only flip side, from a Trump standpoint, I would say, is that there is a possibility, or there's a belief among experts, that Trump will be far more decisive in getting the wars across the world in check, or he'll be able to, I don't know whether it's actually true or not, but possibly the Russia-Ukraine war could get resolved and today we are seeing some inflation, also because of the trade disruptions because, you know, as the war happens in in the Middle East, some of the shipping routes are closed, and it takes that much longer and the costs go up.
But on an overall basis, I don't think either side is going to help inflation. I mean, that's, I may be one of the few ones saying this, but that's, that's my view that inflation is not going back, going away in a hurry.
No, we really love and respect your views, and hence, even if it's a minority view, it's great to get. So, my question, therefore, is what happens to flows because FIIs have not had love for India, for sure, this calendar year, does it worsen? Do you reckon that flows out of India could worsen if this were to be the case, that it is reflationary, the markets preempt what happens six months out, and therefore flows continue to be outwards, the way they happen in October?
Sridhar Sivaram: So this has been my view for a while, that Emerging market as an asset class is dying because this asset class hasn't given returns, say, 10 years zero return, and if you take even 20 year, it was like 2% or 3% and only two countries have really given any sort of reasonable return in the 7-9% range, dollar returns, which has been India and Taiwan.
So, you know, the bulls argue that it is China which has brought down, you know, the returns. But when you drill down deeper, everything else is a basket case. So I think this asset class is seeing a lot of redemptions. As a result, maybe newer asset classes will come, which are ex-China or Asia, because just keep in mind that Emerging markets as an asset class have commodity exporting and commodity importing countries, current account surplus and current account deficit countries. So, it has a per capita of $25,000 to $2,500, there is no homogeneity in this asset class.
So, whatever was done, say, 30 years back, it hasn't really given the fruits. So how long will people wait for returns? I think a larger part of the exit because what I know from interacting with some of the larger Pension funds is that if an asset class doesn't give returns for more than 10 years, then they start pulling back. Keep in mind that the U.S has given such huge returns. So, if you're based in the U.S, and you're allocating 5% or 10% to Emerging markets, it hasn't given any returns, you go back to your base. So, I think that's to a large extent. I think that's what is happening. In between, you can argue that some flows have gone to China, but I don't think that's the larger part.
If you are a global investor right now, you have a choice of I mean, whatever the new government is, the hypothesis as things stand, the numbers as they stand. Let's say a Trump-led Republican party in power. There is the NDA in power out here, and China, whatever the NPC does, will get known in the next couple of days, but China is doing what it is doing as well. If you had $1 to invest across without any restrictions, where would the preferences be?
Sridhar Sivaram: Obviously, the U.S. I mean, it's 70% of the benchmark. If I'm a global investor, it's 70% of the benchmark. So, the Dollar.
Let me simplify between China and India?
Sridhar Sivaram: Obviously India. I mean, one, because I'm based here, so I understand India far better. Two, the reflation in China doesn't seem to be going away in a hurry, and they haven't done enough to suggest that they are pro-business and you keep getting some news flow here and there.
It may be very cheap market, and you always get violent returns in the market, but, I mean, I just give you one number that March ‘20 low for China, which is HSI which is the Hong Kong-listed index, was something like 8,000, ours was maybe 8,500, today we are at 24,000 and they are still at 7500. So, I'm saying they still have not reached the March ‘20 lows. So obviously these markets got decimated. So obviously you'll get violent returns in this. Every year you get a 30-40% return, and then it collapses again. So I'm not a Bull in China.
It's becoming very difficult to predict what that market will do per se, policy and return wise, is what you are saying. In India, the recent quarterly numbers seem to suggest that there is a bit of a slowdown underway. Some people argue that the government spending has been subpar, and that picks up and that revives, if not in the O&D quarter, then from Jan, Feb, March quarter, the numbers and the GDP starts to look a lot more benign than what it has. What's your thought here?
Sridhar Sivaram: I think we've got almost a three-year CAGR of over 20% earnings for the large cap. I think there is a reversion to me, which is closer to 15% which means that you will get one year of subpar results, which could be this year, and we may go back to a trajectory from next year. So anyway, the market needed a pause.
If you take the last one-year return for Nifty, it's up 25% after the correction. Mid-caps are up 40% if you had asked me last year, same time, with two wars going on, and if you had told me the Indian election results also that Modi will not come with full majority and after all this, the market will be up 25, Midcap will be up 40. I would have said it's a joke, but that's where we are.
So I think the market needs a pause and you can find various reasons for why the markets are correcting, but earnings have to catch up. So I think it's good. Whatever is happening , that's my broad view.
But will it continue to happen, or do you think a bit of a revival? So, I mean, right now, it's what, 2-2.5% earnings cut for the year, as I read a sell-side report, which came in, I think, yesterday, post numbers thus far, do you think there is more correction underway based on the slowdown?
Sridhar Sivaram: I think financials will see massive earnings downgrades, not the big banks, but NBFCs, MFIs, Small finance banks. I think the next quarter is going to be a disaster.
Okay, you've been vocal on this, and I want to come to that in a bit. But first, the larger universe. Do you believe that there will be a further correction into Indian markets from here, based on an earnings downgrade?
Sridhar Sivaram: So, it's very difficult to predict market short-term views, you know, because flows can have an impact. You had large FIIs selling. You had very massive FIIs support. If say, FIIs turn, then the markets could move up. But eventually earnings have to catch up. So if you ask me, in the next six months, I think markets will be roughly in the same range, if that helps. I mean, that's my broad view, that earnings have to catch up.
There are too many ifs and buts earnings are not that great in the short-term, consumption is slowing down. We have some uncertainty here and there. So I think broadly, I mean stock specific, you know, there could be sectors which may do well, some may do badly, but overall, as an index, I think we'll muddle around it at this level for the next six months, till the time earnings catches up, and we'll start looking at the year ahead.
Okay, now smaller financials is the next question. But before that, the question is on large cap banks. Almost every sell side note that I see now is saying that, hey, the discounts are so high this quarter, a few men have done well, even if the boys may not have, reference to a couple of other banks. But large banks, are they looking like presenting a good opportunity or not really?
Sridhar Sivaram: With the view that I don't see too much upside in the market, the larger banks seem like a very safe bet right now because they will be able to weather the storm far better than many of the others. We've seen that already in this quarter, and we think that that will continue over the next few quarters. They are not guiding for huge growth. So if you look at a few of the banks, one of the banks said that they will grow lower than the system.
The other bank is saying, we don't want to grow higher than the system. So you're talking of banks which are conservative in an uncertain environment, where regulator is also, you know, doing more than what they normally do, which is stepping into various areas and asking banks and financial institutions to do X, Y, Z, or asking them not to lend, or any of the other things. So I think in this uncertain environment, I would say the larger banks look far better to me. It's also the preservation of capital to some extent.
You have a choice to sit on cash. You rather sit in banks as opposed to cash?
Sridhar Sivaram: So, it's not always easy to, you know, enter and exit. If I see that, I don't see too much of a downside, and it's very difficult to predict when the upside happens, you are better off just staying put with them. Yes, if you ask me, is cash better, possibly in the next six months, it's possible.
But if you ask me, personally, I'm invested in large cap banks. It's easier for me as a person to sit on cash, but I'm still invested in large cap banks, because it's very difficult to predict exactly what happens, but it looks safer than many of the others. Let me put it that way.
This helps Sridhar, because, you know, a fund manager's view is also based on the mandate that the fund has, and therefore that may be at odds with what a retail investor or an individual investor can do as well. So, this really helps.
Now to something that you've been vocal about for the last 12 months. I've seen your posts now for maybe 12 or 15 months. I don't quite recollect which MFIs and this quarter, if not the previous ones, but this quarter for sure, in fact, even in the previous ones, but this quarter showed that there is an issue out there. How serious is this? What is the investing implication here because a lot of people might have some of these investments made at slightly higher prices, and they are kind of licking their wounds currently and hoping for a comeback. You think the comeback is not happening?
Sridhar Sivaram: I think this is a very serious issue, and I think the worst will be the next two quarters. So let me put some numbers to put this in context. So, MFI is about Rs 5-lakh-crore book, roughly, you know, give and take a few Rs 10,000 crores here and there. From what I understand, speaking to many industry experts, is that 10% of the book is a problem which is roughly Rs 50,000 crores, and this is the 10% where you have multiple lenders.
So, when I say multiple lenders, these are over and above five lenders to a single lady and in some cases, it is 10. In fact, I recently met somebody from the financial market, who said that of all the applications that they're getting for loans, 10% of the applications have 10 or more loans already sitting on their books and I'm like, what is happening here? I mean, this is so crazy. So why is the guy applying for an 11th loan because there's a massive evergreening that is happening, which is you're not able to pay one guy, so you're borrowing from the other. This is something that I've highlighted for a long time, specifically for MFI, and honestly, I didn't know the gravity of the problem at that point, because I was just looking at the external data that if I look at the last five years, or the seven years, the customer growth has been 4% or 5% and the loan growth for MFI is almost 20-23%.
When you see such data, you know that you're giving more loans to the same lady or the same person. This, in my view, is an evergreening, industry you know, says differently, and we're seeing the effect of that now. So the other problem that has happened to the industry is now the industry is pulling back, which is, if you look at the loan book, the loan book is decrowing, so they are not giving fresh loans, which again, causes problems. What I understand is that the RBI has done something which has not been highlighted very well, is that they have banned something called Netting. Now you may ask, what is Netting? Even I didn't know till about 15 days back, that if a lady has to pay 10 instalments, and she's paid six or seven, say, a Rs 30,000 crore loan and she's paid 20 and 10 is left, the MFI gives a fresh Rs 40,000 crore loan out of that, takes the 10,000 has been repaid. So it's almost like Evergreening. You're not able to pay the 10, okay, I'll give you more. So my old loan is repaid, so it is green, so it is perfect.
Now a new loan stands, so she has another six months to figure out how to repay. Which RBI has banned, by the way, from what I understand, all this is going to cause massive issues. So I think the industry has really been irresponsible, is my view. I mean, I wouldn't have used such harsh words, but when I look at the data of and a lot of MFIs and small banks have put out data of what percentage of their customers have, more than four loans, more than five loans. It is quite a shocker that how did you even reach this situation? Why would you want to give a sixth and seventh loan to the same person? It's baffling. I think this next two quarters will be very bad, but this has a cascading effect, because banks are pulling back on lending to NBFCs and MFIs, so they are not going to get funding that easily. So I think that we have more pain.
