Are you surprised by this move in the market, the kind of resilience that one has seen and the fact that we have pretty much covered all of our losses from those April 2nd tariff announcements?Anshul Saigal: When you saw the volatility in the markets and then you compare it to the commentary that companies were giving whether in private meetings or in meetings that they were doing for results calls, it was quite clear that there is a huge dichotomy in how the companies are viewing their future and how the markets are reacting in terms of prices.
Of course, some of it was that the markets had over the last two years rallied a lot and they needed to consolidate a little bit which happened, but usually when this plays out, you see a over shooting of downward trend in the markets which we saw in the period November of last year to say February of this year. We believe that the strength on the ground of businesses is so robust that if this was at all a correction, it was a blip in a long-term trend and that the long-term trend for these markets remains very robust.
At the margin, our belief was that the tariffs also will be positive for India and given that as well, the volatility once it passes, people will realise that this is a great time to be buying India and some of that we have seen in the last say 40-45 days play out in the markets. We believe that there is still a lot of value in the markets, value in terms of growth that is not priced in and there is money to be made over the next one to two years if you pick the right stocks in this market.
What is your view on the fact that we are seeing so much of uncertainty when you talk about the tariff and the fact that you have seen this recovery in the markets, at least it is giving some hope to a lot of them but where do you think the hope actually lies to make money going ahead when you talk about the sectors.Anshul Saigal: Yes, you are right there is a lot of uncertainty, but uncertainty gives you opportunity. You will not get opportunities when things are certain, because prices are really building in that certainty. If you look at the tariffs which you mentioned and the uncertainty around that, let us look at one sector in particular and talk specifics. let us look at the textile sector. Now, India caters to only say 12% to 15% of the total textile imports into the US in certain categories. In other categories, as low as 3% to 5%.
The major importer into the US is China. If there is a relative impact, which is much greater on China as compared to India on tariffs, then Indian exports into the US become more competitive. Just anecdotally, I was speaking to someone else the other day, and this gentleman used to get one enquiry over three to four months on these label printing machines in India. Last week, he got four enquiries. That tells us something that even the manufacturers in the country are seeing that there is going to be significant demand uptake in textiles and they are preparing for that. For textiles and many subsectors where India is a fraction of global imports into the US, India will become more competitive and the tariffs will be in the long term beneficial for India.I am wondering if that is a listed player.Anshul Saigal: It is not a listed player, it is an unlisted company I was speaking with. But it was eye opening because clearly there is tailwind in demand in a segment which is a high value item and a very specific item for one industry.Other than that, where do you see opportunities in this market or rather, what would you avoid?Anshul Saigal: That is a very pertinent question, both on where we see opportunity and where we should be avoiding certain segments of the market. Opportunity wise, what is going to happen as a result of the tariffs is there is going to be in-shoring of capacity into the US. Similar trends will be seen even in Europe.
Europe has, in many instances, increased their defence budget from 2% of GDP to as high as 5%, which means the requirement of manufacturing within Europe will go up. Now, if you take both these things together, first capacity, then manufacturing of even defence equipment and others, then demand for metals is likely to go up materially.
So, companies that benefit both on account of volumes as also on account of prices, companies which are trading at quite low valuations today because of the trend not being so positive in the last two years, may be beneficiaries going forward.
Now, one can play this through manufacturers of metals or through distributors of metals. There are many other opportunities in this space as well. But metals as a category, we think, will be quite attractive. On the other hand, what the tariff situation has done is that it has created some sort of an uncertainty on capex in certain segments, and also spends on tech in certain segments.
If you notice, the results of tech companies have been quite tepid. Their commentary has also been tepid. One, valuations have come off a little bit, but they are still very expensive. We believe that that is a segment we would take some time in getting into and we would avoid that. In pharma, CDMO is another segment which looks very interesting in the context of how small India is, 3% to 4% of global supplies, while China is far head and shoulders ahead of India, as high as maybe 50-60%. That could be a transfer to India over a period of time. These are some segments where we see opportunity.
What is your take on what we have heard from some of the IT bellwethers – TCS, Wipro and Infosys? The outlook is bleak. Do you think they make for good contra plays, considering the correction also has been very steep and very elongated in the entire IT pack?Anshul Saigal: While the commentary has been weak, the numbers and guidance has been quite weak for both the companies you mentioned, but TCS in particular made a very interesting comment. They said that they believe that ordering activity has not come to a standstill. It has only been deferred. They believe that the financial companies in the US are just deferring their decision because of tariff uncertainty.
But they are going to come back with gusto whenever this uncertainty comes down because tech spending is on the top of all CEOs’ minds given that at some point, tech will become interesting. But for an individual investor like myself, it becomes not so attractive to look at this space for absolute returns when the sector is trading at 25-30 times despite the consolidation over so many quarters in a row.
While growth is 1% to 4-5%, I can find much better opportunities. I do not necessarily have to be in tech and I can catch future trends which will make much greater absolute returns from here. So, for me, it is not a very attractive sector. But for someone who is building a professional portfolio, clearly tech at some point will become interesting.
