‘High valuations won’t stop investors from buying Indian equities’

Though, “the natural caution is the valuation," he warned. From the valuation standpoint, although India is not cheap, it is not cheap for a reason and that is the growth. More importantly, he believes that “although investors will take note of the high valuations, it won’t stop them from buying Indian equities".

Edited excerpts:

To start, what is your investment strategy, particularly in light of Trump's re-election? Has it shifted in any way?

The US election is the most significant event of the year for global investors, sparking plenty of pre-election debate about positioning. However, with polls consistently proven wrong, the unexpected "Red Sweep"—Republicans taking the White House and Congress—was seen as the least likely outcome.

Before the election, we were bullish on US equities, especially technology and financials, and favoured Indian and Japanese stocks. We were more cautious on China and Europe. Post-election, we didn’t change our positioning, as the outcome actually reinforced our views.

We continue to favour US stocks, particularly in technology. The reason is that Republicans are less likely to break up major tech companies like Google, Apple, and Facebook, whereas Democrats have been more focused on antitrust and competitive behaviour. We believe Republicans will support these big tech firms in their competition globally. Our overall positioning has not changed. Though, the one thing that we added after the election was US small- and mid-caps.

What’s the reason for this addition?

The reasoning is quite straightforward: under Trump, Republicans are likely to pursue significant deregulation, reducing rules and making it easier for businesses to operate. As a result, small-cap stocks are already performing well, and we believe this trend could continue for the next one to two years.

So, you mean apart from the large-caps in the US, there is a growing preference for mid- and small-caps?

Exactly. Now, one has to be mindful that small- and mid-caps are more volatile than large caps. That means if you are making this recommendation to invest, you are basically saying take on more risk in your portfolio because you're adding this component in which is high beta, more volatile. We proceed cautiously, making these smaller, diversified positions while always considering portfolio risk. We think always about portfolio risk, this is a small position, not a big position because it is more volatile.

Additionally, following the election, we reduced interest rate risk by recommending shorter-duration bonds in fixed income, favouring bonds with a five-year maturity over those with 15 years or more.

What’s the reason for this?

We see potential risks ahead, given Trump’s pro-growth approach focused on tax cuts and deregulation. While this initially boosts growth, there’s a chance that US inflation could rise in the second half of 2025. Although inflation is currently trending down, allowing the Federal Reserve (Fed) to cut interest rates, if inflation becomes persistent later, it could hinder further rate cuts and create potential tension between the White House and the Fed. With this in mind, we are recommending shorter-term bonds in anticipation.

Where does India stack up in your portfolio?

We have been advocates for India for quite some time. India stands out as a compelling growth and transformation story, largely driven by infrastructure, with GDP growth projected at 6.5% or higher in 2024 and 2025—one of the highest growth rates of any peer economy in the world.

So, we want to buy that growth. Having said that, the natural caution is the valuation. From the valuation standpoint, although India is not cheap, it is not cheap for a reason and that is the growth. We think that, although investors will take note of the high valuations, it won’t stop them from buying Indian equities.

Can we say that expensive valuations is one of the concerns for foreign institutional investors (FIIs) pulling out of India?

We are not too concerned with fund flows or short-term movements. Some investors may see China’s recent stimulus announcements and low equity valuations as a reason to take profits in India and reallocate to China, which might be showing signs of improvement.

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However, we don’t share that view. China’s stimulus measures are spread over several years, not a concentrated push, and are largely aimed at managing ongoing challenges—such as slower growth, real estate sector issues, and financially strained local governments, and it is a long laundry list. We don’t believe there is a need to worry about foreign financial flows, as that is more of a tactical thing. Structurally, we remain bullish on India.

What about the other markets such as Japan or Taiwan? Are there any exciting plays apart from India?

Japan is extremely interesting right now, as it’s experiencing a profits boom. Japanese companies are highly profitable, paying more dividends, and increasing share buybacks. Corporate governance has also improved significantly. However, the current weakness of the yen complicates things. While the yen is at a very low, cheap level, the political situation in Japan remains unclear, and ongoing discussions about further stimulus could keep the yen under downward pressure. So, while the currency outlook is complex, on the corporate front, Japan presents a strong investment opportunity.

In the near term, US small- and mid-caps, particularly financials, stand to benefit from a steeper yield curve, which will boost their profits. Healthcare, especially the rise of anti-obesity drugs, is also very promising. When it comes to artificial intelligence, while the technology itself is attracting a lot of attention, what’s even more interesting right now is the infrastructure behind it. AI models require massive amounts of electricity, so the US power grid and infrastructure will need significant investment. Companies involved in building this infrastructure in the US and Europe are poised for strong growth.

Are there any negative catalysts for equities? How big a concern is geopolitical tension?

Yes, it is so. Our 12-month gold forecast is $2,850, indicating moderate upside from current levels. Given Trump’s unpredictability, geopolitical risks are likely to remain elevated over the next few years, and gold can help manage that.

Other than geopolitics, a key market challenge could come from rising US inflation in the second half of 2025. This would pressure the Federal Reserve to raise interest rates, which conflicts with the White House’s desire for lower rates. The Fed’s dual mandate—ensuring both full employment and price stability—means inflation control could become tricky, leading to potential conflicts and market volatility, more in the bond market than on the equity side.

When foreign investors look at India, is valuation their only concern right now? We’re seeing money flowing into other markets like South Korea and Japan as well.

Money flows around, but it’s not the end of the story—it can always come back. The key narrative for international investors is that India is delivering on infrastructure. As long as projects stay on track and are delivered on time and budget, it’s fine. However, if projects start to slip, face delays, go over budget, or get abandoned, investor confidence could wane. India still lags China in infrastructure—China has nonstop high-speed rail, ports, and airports, while India has been behind. But India is catching up, and it must maintain that momentum.

Do you see Middle East tensions impacting financial markets, and have you factored that into your portfolio decisions and market selections?

The market tends to react briefly to Middle East tensions, as long as oil supplies continue to flow through the Straits of Hormuz. If this narrow waterway between Iran and the UAE remains open and oil moves as usual, markets won’t see much impact. However, if it's blocked due to violence or piracy, oil prices would spike, and markets would react more significantly.

Considering India and the concerns over valuations in other markets, do you see the China-plus-one or Europe-plus-one strategy playing out for India?

Under President-elect Trump, he will likely continue focusing on bilateral trade agreements, country-to-country, and avoid multilateral deals, such as US and Germany or France instead of the US and the European Union. Another trend is the significant increase in global defence spending, with countries strengthening their military as they move away from reliance on multilateral agreements. The China-plus-one strategy is part of this broader shift toward multipolarity, with multiple global power centres emerging.

Read more: Number fixation: Trying to quantify everything could lead us astray

This process is very slow, so it’s unrealistic to say that the dollar will be replaced overnight. What’s happening is that foreign investors are keeping their existing factories in China, but for new ones, they are looking elsewhere. India, Vietnam, and Thailand are all compelling alternatives.

In the battle of investment opportunities, who comes out on top—China or India?

Both China and India have leading companies in their fields, but China is experiencing a growth slowdown. A decade ago, China's growth was much higher, but with a declining working-age population, growth has slowed to 4-5%. In contrast, India is still early in its growth phase, capable of 6-8% growth, which is necessary to reduce poverty and generate positive outcomes. It's not about China versus India—both are at different stages of development. Right now, investors are drawn to India's potential for a significant catch up, driven by infrastructure development, which will enable the creation of factories and trade routes. While China leads in this area, India’s progress is appealing to investors seeking change and growth. So, it's about catch up and markets. Investors like the delta and hence they like change.

Is there anything else you'd like to highlight that we might have missed?

The next two years will see higher market volatility, especially with the outcome of the US election. A Kamala Harris administration would have been more predictable, but with Trump, we’re in for a lot of changes and legislation, requiring investors to move quickly. It will be riskier, but also offer more opportunities. Success will depend on making the right calls, but getting them wrong could lead to bigger losses. In 2025 and 2026, with the midterm elections approaching, American voters tend to punish the party in power, potentially shifting control of the House. The Trump administration will have two years to push through its agenda, and this heightened volatility will affect the currency, bond, and equity markets.