Saldanha remains positive on stocks such as ICICI Bank, PNB Housing Finance, Data Patterns, Bharat Electronics, Netweb Technologies India and GE Vernova T&D India. While he expects further opportunities in Indian exporters, he suggests waiting for greater clarity before adding to the space.
He also sees a longer-term role for India in global supply-chain diversification, despite near-term uncertainty around tariffs and geopolitical risks.
This is an edited transcript of the interview.
Q: Not a great start for the emerging markets. Are you looking to bring down your exposure across emerging markets, given what we’re seeing on the screen? How worried are you? Is it flashing a warning sign? Is there pain ahead?
A: Globally, risk is rising. That’s the risk for us. You just mentioned looking at Japanese interest rates. My entire 30-year career, it’s been a bear market in Japan, and this is as high as it’s been.
I think people start to worry about the US fiscal situation, the war that seems endless, and there’s no end ramp in sight. So, my fear is that, especially for artificial intelligence (AI) and the big CapEx spend that is relying more on debt, does that music start to stop? And I think that’s where people are getting a little bit nervous about this.
Agreed that demand is super strong, but I think that’s where you’re starting to see the likes of Korea and Taiwan, where honestly a lot of retail participation — I would call them punters — are starting to get called out on their margin loans, and you’re starting to see, you already have seen, a big drawdown and unwind in those positions.
So, I think that’s taken a little bit of the shine off EM. But given the external factors — US dollar, inflation factor, especially with imported oil for a few countries, including India, and generally the flight to safety on the bond side with yields moving up — it’s not a great trifecta in the short term, but definitely creates opportunities for EM.
I do think fiscally you don’t have the Fragile Five anymore. I’d argue you probably have a fragile one. And I think that’s good news, but it’s first to sell on the news, and I think the fundamentals start to come through better on EM.
Q: Do you think, the start of a more entrenched kind of phase where this risk-off phase will intensify? Or do you think this will pass quickly? Are there any tells? Is there anywhere to tell?
A: It’s difficult to tell. I would say it probably lasts for a little bit. And obviously, we’ve got midterm elections coming in the US, so there’s a lot of angst and fear.
Data centres, pushback to data centres, is rising quite significantly and becoming a political agenda. So, I do think there’s probably this uncertainty factor over the next couple of months that’s probably going to pervade us.
So, I’m not sure it’s a quick fix, and neither is the Iran situation having an immediate fix either. My guess is the Iranians know that they need to play as well into the midterm election cycle. So, it’s going to be rather tricky, and I’m not sure it’s a quick fix, especially as you look at the inflation numbers that seem somewhat sticky.
Given the Fed and Treasury, we’re kind of in a no man’s land here, trying to push for lower rates, but realistically, the numbers are not pointing in that direction. So, I think at best it’s a pause, but there is obviously that angst that I can’t see just going away immediately, if that answers your question.
Q: In the past, you’ve used phases like this to pile on some stocks. Defence is something that you were positive on. I think Netweb was another stock that you all owned. It was an anti-consensus when you all got in, and you’ll build onto that position. Given that we’re going to be in a bit of uncertainty for a bit, what are the stocks, what are the sectors you’re looking at from our Indian markets?
A: One more point I should bring up is you’ve got this Lindsey Graham bill as well, right? So, we’ll have to see how it moves through the House, and it’s kind of a big number, right? It could be as high as 100%. I don’t think that’s going to be realistic, but based on Russian oil imports, India is well into that camp. There is tail risk as well.
So, I think with India, you saw the mean reversion trade. It got massively oversold into March, and it created a good opportunity. We’re always looking longer term and looking more for those opportunities of buying in.
We did add a little more selectively to tech over the last couple of months, and I think with India you’ll get another chance with some of the exporters. The real effective exchange rate is super competitive, especially relative to China, so I think you’re going to get those opportunities coming about.
There will be a little bit of noise into this bill that I just mentioned about, but that creates the opportunities. I still think industrial, defence sectors are really solid, and I do think that across non-banking financial companies (NBFCs), you’re starting to see with the numbers you’re not seeing significant net interest margin (NIM) compression, and more importantly, you’re seeing the cost of credit and the balance sheet looking pretty solid.
So, I think that will continue to bode pretty well for India as well, and you’re starting to see the basing out on the earnings, so that’s another area I would say that looks positive.
I would wait on the exporters just to get a little more clarity. Some of those have already bounced nicely off the bottom, but I do think that longer term, the strategic rationale to own them in a global diversification of supply chains, India plays a positive role.
The Lindsey Graham bill is about tariffs on countries that import Russian oil. The first one was countries that import goods directly from Russia, which obviously India doesn’t fall into, that’s a 500% category. You’ve got up to 100% tariffs that potentially could be put on. That’s a negotiating point. I don’t see it happening for medical and healthcare-related items. I don’t see it on services for IT, because that’d be very inflationary and out of the scope really. Those would be excluded, but you never know in terms of gem exports, some of the industrial exports, would that just be a bit of a punching bag, if you will, from a negotiating standpoint.
Q: Talk to us about individual positions if you can. You did give us some flavour, but what else would you look to buy if this were to be a bit more of an intensified, entrenched sell-off?
A: Just to end your previous point, I agree with you that that makes oil prices go up globally, right, if you’re going to source from somewhere else. That doesn’t help either the US consumer by all means.
If I think of names, I would say on the larger banks, we own ICICI, that’s been a core holding for us. I do think the housing finance companies, something like PNB Housing Finance on the housing finance NBFC side, looks solid.
I think the gold loan companies have grown phenomenally well and it’s not an area that we have significant direct exposure, but that’s a good place to be.
I would continue to own what we have owned from Data Patterns on the defence side, Bharat Electronics. I would continue to own the Netwebs of the world, GE Vernova.
Watch the full conversation here
So, a lot of the power companies, obviously you’re going to get a little bit more noise on the export front, but you’re seeing more and more China getting shut out strategically, barring the short-term noise on tariffs with India.
I do think there’s a role for India to play, especially for the multinational companies (MNCs) in particular to export out. And you’re always going to have the local players that are building their own capabilities, like CG Power and Industrial Solutions, that, with a longer runway over the next 3 to 5 years, has share to be gained globally.
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