Could The Sensex Hit 100,000 By Next Year?
Global brokerage Morgan Stanley has just put out a bullish report on Indian markets
On Episode 646 of The Core Report, financial journalist Govindraj Ethiraj talks to Pawan Kumar, President at Seafood Exporters Association of India as well as Vaibhav Sanghavi, CEO of ASK Hedge Solutions.
SHOW NOTES
(00:00) Stories of the Day
(00:50) Could the Sensex hit 100,000 by next year?
(02:40) The rupee falls despite the dollar index also going down
(03:08) Could lower US interest rates send more fund flows to markets like India?
(14:11) Oil prices slide again, BP makes a big find off Brazil
(15:19) How Indian seafood exporters are trying to cope with new US tariff structures
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Tuesday the 5th of August and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai and in Mumbai, India's financial capital.
Our top stories and themes.
Could the Sensex hit a hundred thousand by next year?
Could lower US interest rates and more fund flows to markets like India?
The rupee falls despite the dollar index also going down.
Oil prices slide again, British Petroleum and now BP makes a big find off Brazil.
How Indian seafood exporters are trying to cope with new US tariff structures.
The Markets And The Rupee
Investment banker and brokerage Morgan Stanley has put out a bullish report on Indian markets saying the Sensex can hit a 100,000 mark by June 2026 which is a bull case with a 30% probability according to a report in Money Control. Morgan Stanley's also included other not so bullish capabilities which sees the Sensex at a lower mark. Now, the reasons this could happen according to Morgan Stanley is India's strong population growth, a functioning democracy, macro stability influenced policy, better infrastructure, rising entrepreneurial class and improving social outcomes, all of which are in progress or work in progress.
So it's not clear whether this is the exact trigger but maybe Morgan Stanley sees this as a longer term trigger and therefore is arguing for a stronger case for re-rating of Indian markets. The report by Morgan Stanley as part of its India equity strategy playbook said that one should get ready for new highs in the months ahead as India could gain share in global output in coming decades thanks to those strong foundational factors. So the reason I'm mentioning this up front is that there are other, at least two in this case, reasons that Indian markets could see some shifts and both are somewhat shorter term and I'll come to that in a moment.
So on Monday the Sensex and Nifty were up thanks to a prospect of an interest rate cut and earnings flows. While there is some hope of interest rate cut at the conclusion of the monetary policy committee meetings tomorrow, a realistic assessment is that of course it's unlikely this time because even if we want to respond to a tariff shock, the reserve bank or the central bank may wait a little to see how and when the transmission actually happens. The Sensex was up 418 points to close at 81,018 and the NSE Nifty 50 was up 157 points to close at 24,722.
So the markets did begin on a firmer note this week. The rupee did not. It lost ground unusually despite both the dollar index and crude oil prices falling it closed 20 paise lower at 87 rupees 66 against the dollar according to Bloomberg and earlier in the day on Monday it had opened higher.
A business standard poll says that a majority of its respondents saw the rupee at about 88 to a dollar with some support at 86 rupees 50 per dollar by September 2025 which of course is just next month. So where are broadly the markets headed now? I reached out to Vaibhav Sanghvi, CEO of Ask Hedge Solutions which runs alternate investment funds and I began by asking him to tell us a little about his fund itself and more importantly what was in his mind right now and what he thought were going to be the triggers in the markets in quarters ahead.
INTERVIEW TRANSCRIPT
Vaibhav Sanghavi: We manage an absolute return fund. Of course our core competence is long short strategies and we manage strategies across the spectrum. But our flagship fund is an absolute return fund generating returns irrespective of market conditions.
Now we can do that purely because we have an ability to go long and short on the markets and that is what we've been doing for the last 20 years. So it adds a great value to the portfolio looking at a debt plus plus kind of returns.
Govindraj Ethiraj: Got it. So if I were to now come to the markets, I mean we've obviously had a lot of factors playing into prices. They include of course earnings, they include the state of the economy, that's the Indian economy and of course there's this whole issue of where tariffs will finally settle.
Because at this point of course we are staring at a more firm figure of 25 percent. But is all of this going to influence where markets go or is there something else that you're looking at as you look in the next couple of quarters?
Vaibhav Sanghavi: No, of course Govind. I think what we've seen first of all in the last six months have been nothing short of an extremely volatile period which included a lot many geopolitical events and of course the tariffs as well. Now tariffs at this point in time have not ended in that sense and you are seeing every day some new developments kind of happening on that ground.
What you are expecting from here onwards is that India's trade deal, potential trade deal with the US may happen but not right at the second in that perspective. It will take some time to negotiate and eventually turn into a trade deal which may be beneficial for both the countries. While that kind of happens my take is that incrementing news on tariffs is having a diminishing effect on the inputs.
So I do think that beyond a point it will get discounted and to a great extent it's already been discounted. But what we are keenly watching here is the movement of the interest rates from a US perspective. There's a lot of exchange between the President and the Fed.
We will wait and see how data kind of pans out and if that kind of happens then we may see very interesting times especially for emerging markets.
Govindraj Ethiraj: And that could obviously be a longer term trend. So why is that? I mean and how does this contrast to let's say previous periods of low interest rates or greater emerging market flows?
Vaibhav Sanghavi: Perfect. So we do see in 2021 right when rates actually started moving up from a US perspective. There's a direct correlation between US rates kind of moving up and the subsequent flows coming into the emerging markets as a basket.
And if you remember in the year of 2022 once the rates kind of started to spike up in the calendar year of 2022 we witnessed one of the highest redemptions from India perspective which is a capital outflow which is close to about say 20 billion dollars for that year. Given that if that kind of movement generally would have happened 10 years ago then the market would have taken a very severe beating. But fortunately I think domestic investors kind of compensated and we were good.
But that continued over the next three years. Eventually if you see from a fear perspective the net inflow from an FPI perspective has been nothing in that sense right. So when we look at a scenario when the US may start decreasing the rates then there is a full possibility that the emerging markets as a basket will attract some good amount of inflows.
Of course India being 20 percent weight in that emerging market kind of basket is likely to get some good inflows if that kind of happens. But if that happens just mind you that we are currently at a decadal low from an FPI ownership in India. So the movement of the flow comes and it will probably be crowding in you know during that period of time which may expand the valuations during that stretch.
Govindraj Ethiraj: And I'll come to valuations in a second but are you saying that this is perhaps the only major trigger that we are now or could now look forward to in the markets. I mean whether or not it happens, is there any other cue that we could be looking out for or could save us so to speak from the markets going sideways in the next few months.
Vaibhav Sanghavi: No of course because I'm not saying that that's the only one. I can say that that can be a big delta. Okay.
Now in a normal context of things, what I also believe is that if you look at the GDP construct which is your investments plus your consumption and plus your net exports we had investments pretty much in place for the last 10 years. This is the first time post the last election when we are seeing a very coordinated action from the central government, state government and the central bank towards boosting the second leg of your GDP growth which is your consumption. Right.
Of course net exports is something which is up in the air. We don't know what's happening to the global economy so that's something we may not take a call on. But when we do think that your investments were in place and consumption getting back because of the concerted effort by all the government agencies is when we do think that the GDP growth might probably surprise over the next 12 to 24 months on the upside.
Now if that kind of happens then the earnings revival is something which is pretty natural and will happen in my view in the second half of this financial year which will probably take the markets up.
Govindraj Ethiraj: Right. And when you say if you feel that there's more investment likely to come I'm assuming one of the contributors to that was the tax relief that middle class taxpayers got. I don't know how that's panning out now because it's already been a few months.
That would only help part of the market. Right. Or do you see that helping the entire market.
Vaibhav Sanghavi: Of course it will help the consumption leg of the GDP. Now it is not only about the tax rebate of course that is very very important and can be a good contributor. But also if you see when the rates get decreased from the RBI then your EMI kind of also gets down.
Right. Which adds to your disposable income. Lastly from a personal loan perspective, the risk rates also have been kind of reduced so that the banks can go and lend to those kinds of pieces or tools kind of give you on criminal consumption.
So all in all when you look at the combined effort my sense is basically consumption is set to revive.
Govindraj Ethiraj: Yeah right and interest rates have been brought down and I guess in six months to one year we'll see more transmission of those lower interest rates. So let me come back to valuations. So all of this is linked to valuations and what's your view on them right now.
Vaibhav Sanghavi: Of course valuations if you see from a relative perspective you know we always have prisms of valuation which we look at. Somebody looks at market capital GDP. Somebody looks at P.
Somebody looks at the price to book. There are various different connotations. Now over a longer period of time we have seen that markets follow the earnings trajectory.
In between it can go anywhere but as we keep on looking at growth of earnings like it will happen the market will surely follow them. Now from a PE perspective when we look at large caps in my view it still looks reasonable. Mid cap and small cap there are some pockets of overvaluation but I'm very very comfortable with those kinds of valuations purely because if they are able to show the growth then you will always see that the valuations may remain elevated over a longer period of time.
And lastly if the FPIs also kind of come about then I think the valuations may remain elevated on an absolute basis or relative basis.
Govindraj Ethiraj: And when you talk about areas within mid cap or small cap that you're comfortable with, are you talking about companies or sectors and if sectors could you name one or two.
Vaibhav Sanghavi: Sure so I think from a relative valuations perspective if you see the new age economy stocks or probably newer business models I think their valuations to some extent are discounted by FY29, FY30 and so on and so forth. Now I'm not saying that they cannot remain elevated. In fact what we are seeing is that they are kind of grabbing market shares because of their technological prowess.
So they will remain elevated and your headline that's why I'm saying the headline number may look expensive right. But as I said I would be fairly comfortable. But from another sector's perspective , what we also do like from the next 12 to 24 months perspective of course we are getting very very constructive on the consumption basket.
You know, for all the reasons which I've mentioned earlier. One that is under owned as well is where we do think that the delta into the price performance would be much much higher. Secondly, financial services is something which we continue to like.
Rural focus sectors because of the strong monsoons we are still very positive on that as well. So all of these sectors are something which we continue to prefer.
Govindraj Ethiraj: Right and you also short you said right. So what would you be shorting at a time like this?
Vaibhav Sanghavi: See I think all the globally exposed sectors to a larger extent which is exposed to the uncertainty on a day-to-day basis from ongoing tweets are something which we would think that we would probably go underweight on or probably avoid you know those kinds of sectors.
Govindraj Ethiraj: Got it. Vaibhav it's been a pleasure talking to you. Thank you so much.
Vaibhav Sanghavi: Thank you very much Govind. It's always a pleasure.
Oil Prices Slide
Oil prices fell in early Asian trade on Monday after OPEC plus agreed to another large production hike in September. Brent crude futures were down to about 69.20 according to CNBC. OPEC plus agreed on Sunday to raise oil production by 547,000 barrels per day for September and this is one among many accelerated output hikes to regain market share.
Elsewhere fresh oil fields are still being discovered. BP has said it's made the largest oil and gas discovery in 25 years offshore Brazil. BP is also now in the midst of a strategic shift away from renewable energy to refocus on fossil fuels.
Yes, you heard that right. It's moving away from renewables to refocus on fossil fuels and focusing on its oil and gas portfolio to regain investor confidence. A Reuters report quoted BP saying it planned to create a major new output hub at the boomerang discovery in Brazil which is probably the company's biggest since Chardonnay in 1999, a gas and condensate field in the Azeri part of the Caspian Sea.
India's Seafood Exporters
India's seafood export industry is worth roughly 60,000 crore rupees and is a good case study of what smaller enterprises are going through right now particularly in the export space as they try and negotiate this phase of uncertainty and what lies on this side as well as the other side. Remember more than half of Indian seafood exports go to the United States. The current 25% tariff now on Indian exports will make life very tough for Indian exporters of seafood divided between the western east coast with shrimp mostly farmed on the east coast.
The industry's wars are also symptomatic of what exporters in general are grappling with today regardless of what product they're exporting and what could sometimes work in their favour. Remember many of them have decades-long relationships with their importer counterparts in countries like the US and that obviously helps in times like this. Ecuador, India's closest competitor in marine exports and geographically of course very close to the United States, has to pay only a 10% tariff to the US.
Indonesia is at 19% and Vietnam is at 20%. I reached out to Pawan Kumarji, President of the Seafood Exporters Association and I began by asking him what the last three months were like since tariffs started rising.
INTERVIEW TRANSCRIPT
Pawan Kumar: The seafood exports out of India is close to about seven and a half billion dollars, of which the U.S. notably is the biggest market, where we export close to about three billion dollars, and we export to about 70 countries across the world, including the U.S. When you talk about the product categorisation, shrimp is the topmost, which occupies almost 40% of the total exports, and then you have the sea cod material, that is a fish and other cephalopods, and the sea cod shrimp, that occupies, when you talk about terms of volume, it is 60%.
When you talk about the shrimp, it is the cultured shrimp, which predominantly goes from the east coast of India, and the fish and other categories go out of the west coast and south coast of India. Fish, you know, you have like pomfrets and cuttlefish, squids, mackerels, a lot of other varieties of fishes, which are exported to various countries in the U.S. is the biggest market for shrimp.
Govindraj Ethiraj: Right, and if we were to build on shrimp specifically, how have things been in the last three months vis-a-vis competitive pressure from other markets, given that you're already facing a 10% duty into the U.S.? See, in shrimp, when you're specifically exporting to U.S., we have three kinds of duties and tariffs that we pay.
Pawan Kumar: One is the anti-dumping duty, which has been there for almost 20 years now, and the second one is the countervailing duty, which came in last year, and the third one is the new tariff, which has been in effect since the 2nd of April, and which was revised again last week. These are the three kinds of duties and tariffs which we pay. The anti-dumping duty is roughly around 4.5%. It is 1.35%, but it's likely to go up to 4.5%, and the countervailing duty is about 5.7%, and now the tariff is about 25%.
Govindraj Ethiraj: Okay, so what would the total impact be? You're saying is it going to be 25 plus 5.8 plus 4.5, or is it a subset of 25?
Pawan Kumar: Yes, the total tariff and duties together will end up paying about 35% today. Of course, we have one more rider which comes with the tariffs, that is the penalty. We are not sure how the penalty is going to come out in the future, as and when it is levied.
Govindraj Ethiraj: Right, and would other countries also be paying the same anti-dumping and countervailing duties?
Pawan Kumar: Not exactly. If you look at our first competitor, the nearest competitor is Ecuador, which pays anti-dumping duty of about only 4%, and they don't have countervailing duties, and the tariffs are about 15%. So Ecuador, which is our biggest competitor, will pay about 19% today, and we are somewhere close to 33%, 34% now.
Govindraj Ethiraj: But it's interesting that you're saying both countervailing duty as well as anti-dumping duty have been in force even before these new April 2nd tariffs came into force? Yes, you're correct. Okay, so my sense is most people would not know about this.
Okay, if I were to now come to how things would have been in the last few months, I mean, can you tell us a little about how negotiations have been progressing? Because I spoke to you a few months ago, and you were saying at that time things were still, you know, people were working it out. But how are things now?
What I mean is between, let's say, importers in the US and exporters in India.
Pawan Kumar: See, initially, when a 26% tariff was announced on the 2nd of April, yes, there was some sort of a disturbance, and then eventually it was brought down to a baseline tariff of about 10%. Somehow we could convince the buyers, and the 10% tariff got absorbed between the buyer and the seller, and we made sure it doesn't impact the farmer. But having said that, business went on smoothly.
If you see from mid-April, May, June were quite okay. As we came close to the July 9th deadline, that is where the problem started, because a lot of things were clear that, you know, there's going to be an additional tariff on India, because the trade deal didn't happen as per the deadline, which was on the 9th of July. And post 9th of July also, the US government was announcing tariffs on other countries, except India.
They, I think, waited for about three weeks. All those three weeks were a little bit uncertain, but still we continued with our shipments. Not in a big way, but you know, they were going.
But when the tariff was announced towards the end of July, that 25% was something which came in as a shocker for us.
Govindraj Ethiraj: Okay. And I don't know if you can share figures of, let's say, a kilo of a certain product from the point it leaves India, and it reaches a store in the US. What is the sort of the price movement, and how much of that could be shared?
And at this point, who will have to absorb more of that price, as opposed to maybe not absorbing it earlier, as you were saying?
Pawan Kumar: See, I'll give you a small example. Let us say, the unit price of a product which is moving out of India is somewhere around $3.60 to $3.70 a pound without the tariffs. But this $3.60, $3.70 is including the anti-dumping and the countervailing duties which are already in place. So when the new tariff came up, 10% was mounted on them in April, and the buyer could absorb it to a larger extent. And then slowly, when we came to this 25%, which was announced last month, now we are not clear on how this 25% has to be absorbed, because it is too early. It has only been three or four days since this has come in.
And the presidential order was only given on Friday, if I'm right. Now the dialogue between the buyer and seller should start anytime now to see how this can be absorbed, and how this can be readjusted in the pricing, or where it has to be readjusted as something, you know, which we are still discussing with various stakeholders, that is the importer and the farmer here, both.
Govindraj Ethiraj: And I'll come back to that in a second. But you mentioned Ecuador, which obviously has a geographical advantage, because it's in the same continent. Now, do people who buy, the importers, or for that matter, the consumers, I mean, do they care about where it's coming from?
Or is it transferable? As in, I could be buying shrimp from Andhra Pradesh, or shrimp from Ecuador, I may not know. And therefore, it's commoditised to that extent?
Or is it a banned preference?
Pawan Kumar: See, I'll answer that question in a different way. When you look at the US market, there are three different segments in that market. One is the retail segment, like Walmart, Kroger's, or Safeway, all the big people, Target, and all these people.
Two are food services, that is a big restaurant chain who buys a lot of shrimp from various parts of the world. And third one, what we call street sales. Street sales, you know, the importers, they buy, sell a few hundred cases here, there, and they distribute locally.
When you look at the food service and retail outlets, they place long-term orders. Some people, they buy for three months, some people, they buy for six months, and some people, they ask for a yearly contract also. So I think that more or less answers your questions.
The first impact will be at the street sales level, because they're all spot buyers. They buy for today, that is the area which gets affected first. Because they cannot pass on those duties or whatever the increase in prices to their end consumer that easily.
When it comes to the retail and food services, they probably have a better cushion. They were able to absorb the 10% quite fast. Now this 25% is something we have to see how we absorb between the retail and the food services.
Govindraj Ethiraj: And who's the biggest in these three, between Walmart, Kroger, versus restaurants, versus street sales?
Pawan Kumar: I think Walmart is the biggest, if my memory is right. Then comes your food services, like your Cisco's, and then you have your Costco's, who buy a lot of volume from India. But by far, I feel Walmart is the biggest.
Govindraj Ethiraj: So you're saying that big stores would be the biggest customers of Indian shrimp at this point?
Pawan Kumar: Yes. So for them to shift their products from India to some other destination, like Walmart, it's not easy for them to ship their purchases, divert them into other countries. The reason is very simple.
When you're selling to Walmart and any of the retail outlets or the food service people, there are a lot of approvals which have to be done in the process, right from the farm level, till the factory level, you know, your hatcheries, the feed mills, your factories, all these have to be approved. So getting the same kind of approval process in the other countries, see, it's not impossible, but it might take a shift immediately. So the immediate impact will be on the, what do you call, the street sales, and then it will be followed by others.
Govindraj Ethiraj: Right. And I guess supply chains act as a moat of sorts, because obviously, if you've built a supply chain over the years, including all these factors that you pointed out, it's not easy to replicate or replace. And both the importer and the exporter would work together to try and see how much they can continue.
Okay. You know, you talked about products that are already out, as in produce that's already seaborne, heading towards the US. So is it clear at this point what the duty impact there will be?
Pawan Kumar: Yes, to a larger extent, once that President's order has been released, the product which is already on water may not be that badly affected. Maybe a few hundred containers might be affected, but largely the product which is there in water may not be affected because they've probably given a breather for products which are reaching US shores before end of September or early October, will not get into tariff, provided they're on waters by the 7th of August.
Govindraj Ethiraj: Right. Last question, Pawan. So what are you looking out for now?
One is, of course, the government part, which we don't know. Many exporters are hoping that there will be some reduction, rationalisation of these duties. But what else are you looking out for?
Pawan Kumar: See, we did have a series of meetings with the Ministry of Commerce. One thing we have told them is, you know, we understand and we support the government that India first, come what may, have to protect our country's interest. And as the Exporters Association, we are with the government.
We all understand and we all respect the fact that India's interests have to be protected in the international market. There's no two ways about it. Having said that, yes, there will be certain situations which were created out of the tariffs and other things.
We need to find a solution slowly so that, you know, the trade at large is not impacted. So we gave a few suggestions to the government to have a look at those solutions and say if you can do a little bit of hand-holding in such a way that we're tied over the crisis. We do understand it's not going to be a long-term issue.
It will be short-term. And I'm sure the government is also actively working towards finding a solution for the deadlock in the trade negotiations. I think the delegation is coming towards the end of the month.
We are hoping that, you know, we find a solution to the existing situation. Right.
Govindraj Ethiraj: Pawan, thank you so much for joining me.
Pawan Kumar: Yeah, pleasure. Thanks. Thank you so much.
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There are some small rays of hope. The India-UK free trade agreement which is now signed but to be implemented can help the industry double or triple its export to the UK but the base is much smaller at just 100 million dollars right now. Exporters including of course seafood are hoping that there are deals or more opening up with countries like South Korea and Australia and of course the European Union bloc. The US is still by far the largest market but that could of course change over time as Indian exporters are able to penetrate other markets or there are other shifts.
