Markets Start September On A Strong Note
The latest GDP numbers were good, even if statistically not fully there
On Episode 666 of The Core Report, financial journalist Govindraj Ethiraj talks to Dr Deborah Elms, Head of Trade Policy, Hinrich as well as Rajesh Cheruvu, Managing Director & Chief Investment Officer at LGT Wealth India.
SHOW NOTES
(00:00) Stories of the Day
(00:50) Markets start September on a strong note. Will they hold?
(02:12) September rains last longer and higher than average as well
(03:35) Have the markets absorbed the tariff shocks, where is the bottom?
(11:47) How is Asia navigating the post Trump tariff world?
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 2nd of September and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.
Our top stories and themes for the day,
The stock market starts in September. On a strong note, will they hold?
Have the markets absorbed the tariff shocks and where is the bottom?
September rains will last longer and higher than average as well, which is good news for the economy.
And how is Asia navigating the post-Trump tariff world?
Markets On A Strong Note
So the latest GDP numbers were good, even if statistically not fully there. And of course, we're trying to get used to life with an economic blockade on some of half of India's exports to the United States, everything except electronics, phones and pharmaceuticals, that is.
But the important point for now is that the stock markets appear to have absorbed the tariff shock, at least right now, though there is still a current of hope that's driving sentiment, including the fact that U.S. appeals court declared most of U.S. President Donald Trump's tariffs illegal, though the tariffs remain in place until 14th of October, pending a possible Supreme Court appeal. Now, how that Supreme Court appeal could go, we don't know, but things are pretty much beyond our control here. So is this the new floor in the market, so to speak? And we'll address that question shortly.
But remember that while the stock markets are looking strong, the currency markets hit another all-time low today. Back in the markets, the Nifty 50 rose 198 points, the most in two weeks to close at 24,625. And the Sensex was up 555 points to close at 80,364.
Elsewhere, GST or goods and services tax collections were steady with take-ins at 186,000 crore rupees, or about $21.2 billion in August, which is about 6.5% higher than the same period last year, according to government data released on Monday. Elsewhere, when it comes to macro figures, monsoons are still a big factor in the macro tailwinds driving growth. So India's southwest monsoon has recorded rainfall at 6% above long-period average on August 25.
The season's cumulative performance over June to August is also 6% surplus. And of the key agriculture states, according to a report from Quantico, most have received adequate rainfall so far in the season, though it's been skewed. But all of this, coupled with comfortable reservoir levels, has led to a steady progress of areas sown under Kharif crops, recording an increase of 3.7% on an annualised basis.
That report said, which also quoted IMD, that the Indian Meteorological Department, saying September rainfall was also likely to be above normal. And we will also see a delayed retreat of the monsoon somewhere towards the end of the month. Yes, it does feel like a long time, but then monsoons arrived in June and they are now, at least on paper, set to leave in a few weeks.
Have The Markets Absorbed The Tariff Shocks?
The monsoons have clearly kicked up agricultural growth and the stock markets have begun September on a stronger wicket.
So the question we are asking now is, in the context of all these macroeconomic tailwinds that we've talked about, have the tariff shocks been absorbed by the markets and do the current market levels, which is particularly the strong start that we saw on the 1st of September, do they reflect that position which is that they've absorbed the shocks? I put this question to Rajesh Cheruvu, Managing Director and Chief Investment Officer at LGT Wealth India, and I also asked him about his outlook for sectors that he was seeing as promising, as well as asset classes that they were recommending to their clients.
INTERVIEW TRANSCRIPT
Rajesh Cheruvu: Almost three weeks back when the first time this announcement came in, it was a shocker. Seems like the market has absorbed it in a gradual manner. Now I think this market is starting to look forward to the upcoming harvest season.
So far I think monsoons in India have been quite good this year, above average monsoons. With that backdrop, I think better than I think average harvest in upcoming season. That combined with I think low inflation, ongoing low inflation and rural consumption has already started showing some amount of green shoots.
Combining these factors and most important thing is that the government has already announced GST cuts during the festive season. Combining these factors, I think the market seems to be actually looking towards better than previous quarters growth numbers in consumption. We have seen some amount of signs in earlier quarters in rural consumption with GST cuts would further actually prep up the spurt in overall consumption growth.
So it seems like the market is looking towards it. That's where I think it has been absorbed smoothly.
Govindraj Ethiraj: Right. And what would you say are the broad two or three trends driving overall market valuations and investments right now?
Rajesh Cheruvu: In terms of trailing basis, if you look at markets appear to be yellow averages. But if you look at it on the forward basis, markets are slightly expensive. The reasons being I think compressed earnings.
For about a good four years of actual post-pandemic, we have had strong earnings. In the last three, four quarters, we have seen some amount of stabilisation or some amount of downward drift in earnings. So with that, I think markets actually the outlook for next two to four quarters are also a bit subdued.
With that kind of actual earnings outlook, forward earnings and forward multiple spaces, markets appear slightly expensive. But we think from October quarter onwards, we could see some amount of uptake start coming in earnings. So to my mind, I think markets are actually well poised for the next leg of rally, start of the next economic cycle or next business cycle and next market cycle per se.
Govindraj Ethiraj: Right. And when you say that you're seeing one is earnings recovery and second is that you're also saying there is a clear consumption spurt, boom may be too strong a word right now. What are the kind of sectors that you're seeing this, which gives you that confidence?
Rajesh Cheruvu: So if we look at the last four years or so, we have not seen strong earnings or strong actual volume growth in consumer staples, FMCG and consumer staples. So when I think GST cuts play out, I think mostly that could be the first segment we might see. Non-discretionary spend could be the primary beneficiary in terms of volume uptake, followed by I think discretionary spend, whether it is organised retail, auto and two-wheeler, four-wheeler segments and fabric and garments, etc.
These are the segments. That's how I think possibly the overall consumption trajectory would actually move up. To me, I think FMCG has actually not participated in the last three years.
If you see it as one sector which has underperformed significantly, I see a good room in terms of I think the first leg of the rally.
Govindraj Ethiraj: What does this tell us about latent demand? For example, if we say that a cut in GST across categories will bring down prices and therefore bring customers in, which it surely will, does it suggest that people could always afford but were waiting for prices to come down or did not know that prices would come down and therefore were just holding on? Or that at slightly lower prices, we could see more secular and higher levels of consumption?
Rajesh Cheruvu: Yeah, I would say I think the second part is likely to play well. That way, the more secular and the long-drawn I think the consumption cycle, I think we might see people will start upgrading themselves in terms of their purchasing patterns, etc. Also, it might start shifting upwards.
That could also combine with volumes. Combining it, I think we are setting for a good consumption-led rally in the times to come.
Govindraj Ethiraj: What are the other sectors and asset classes that you're looking at and you find interesting at this point?
Rajesh Cheruvu: Yeah, of course that I one is these GST cuts is actually the theme possibly one would want to play out for next three, six months. Apart from the discretionary, non-discretionary consumer, followed by financial services, followed by building materials. So these are the segments I think one could actually focus on.
Then I think possibly the export-orientated sectors, I think which might have taken, especially labyrinthine sectors, have taken a severe beating in recent times. But we think governments, both state as well as central governments cannot ignore those sectors because there's a large employment-generating sector after agriculture. So there I think you might see some amount of policy impetus and policy push coming in there to offset, if not completely take out, I think partial offsets could be infused by both state governments as well as central governments.
Those sectors have taken severe beating post this particular imposition of So there you might see a relief kind of thing. Right. And asset classes?
Asset classes wise, as we speak now, I think we are actually quite positive in terms of mid and small caps within equities, mid and small caps we like because there is a severe valuation compression as happened seen already. Once earnings get normalised, I think mid and small caps are likely to lead the earnings growth. So that's where we see some amount of opportunities mid and small cap.
Whereas on a short-term basis, large gaps will continue to outperform. Whereas medium to longer term basis, I think mid and small caps offer greater entry opportunities at this point of time. Within fixed income, recently we have suggested investors to look at considering a duration called increasing duration in their portfolios.
Most recently, I think with the tariff hikes, etc., I think we have seen a spurt in bond yields. So that is actually giving one more opportunity. People who have missed out a year back in terms of taking a duration call, we think this could be one more opportunity to initiate a duration call.
And within the high yield segment, I think BBB to A segment, we are seeing some interesting opportunities in terms of private credit opportunities we are coming across. So where investors are looking for steady cash flows and steady cash yields, etc., that is one opportunity. The third, within alternatives, actually we are quite optimistic on inwards and reads.
Inwards and reads actually provide sustainable longer term cash flows with double-digit yields, cash yields. On a post-tax basis, I also still think seven and a half, eight percent kind of actual tax yield, cash yields they can offer. So families, whoever are looking for a steady cash flow, inwardly read is one good asset class that one should look at.
These are the asset classes we like at this point of time.
Govindraj Ethiraj: Right. Last question. So, you know, you mentioned building materials earlier and you're now talking about reads.
So the construction, real estate, property seems to be a sort of broader area of focus. Would construction itself be an area or is that at this point out of your radar?
Rajesh Cheruvu: Overall, I think if you look at the government's impetus and focus, both state governments as well as central governments focus on housing, combined with the infrastructure spend. So overall, the third aspect to it, I think home improvement, et cetera, people used to consider once in one and a half decades. Now, actually, we are seeing some amount of accelerated activity.
Almost five, seven years itself, I think people are looking at some amount of home improvement spend each year. Combination of these factors, building and building materials, construction materials are actually poised well in terms of earnings growth and actual market opportunity.
Govindraj Ethiraj: Right. Rajesh, thank you so much for joining me.
Coping With The Tariff World
Tariff is a pending trade across the region as tariffs have gone through without any last-minute shifts and changes, at least in the case of India, as we saw just last week.
I spoke with Dr. Deborah Helms, Head of Trade Policy at the Hinrich Foundation in Singapore, and I posed this question to her, or rather, I asked her, how should one navigate this new normal which enterprises and, for that matter, nations are still getting used to? The Hinrich Foundation is an Asia-based philanthropic organisation that works to advance mutually beneficial and sustainable global trade. Dr. Helms was earlier Executive Director and Founder of the Asian Trade Centre, President of the Asia Business Trade Association, and earlier a member of the World Economic Forum's Trade and Investment Council from 2018 to 2020. I spoke to her ahead of the Elara India Dialogue 2025, India edition that started on Monday in Mumbai, and where we are happy to be media partners as well.
INTERVIEW TRANSCRIPT
Dr Deborah Elms: Basically, we've had 80 years of ever-closer integration on a global scale that is being disrupted and rewritten as we speak, and whatever you thought your life was going to be like, my guess is you didn't expect that kind of change, and certainly absent any compelling reason for having it be smashed. I mean, in the past, we've had new systems come into place, but you know, it takes a global world war to set that in place, and so this is very unusual. And that's creating a lot of uncertainty and a lot of discomfort by both individuals who are trying to deal with a completely different professional life, by governments who are trying to sort out what this means, and certainly by companies who are trying to navigate this rapidly shifting environment that they find themselves in.
So the net result of all of that is it's challenging. It really is. We have the remnants of the old system, which are thankfully holding at the moment, but we also have these new stresses and strains, and because the changes are taking so fast out of Washington, it's a little unclear how you're supposed to respond to those kinds of things.
Govindraj Ethiraj: Would it be fair to say that, you know, for the last six months, since April 2nd, when the first reciprocal tariffs were announced, most companies, and even countries for that matter, have really been hoping that the problem will go away in some form or the other, and therefore have not truly prepared for this pass?
Dr Deborah Elms: Well, again, I think it's logical because you're just used to decades of a certain way of behavior, and I don't think anyone anticipated, or at least not that many people anticipated, that we would have the smashing of that system on April 2nd with the announcement of these reciprocal tariffs out of the United States, and especially not with the announcement of those tariffs at the levels that we saw, ranging from a minimum of 10% all the way up to 50%, and I think that was a real shock to everyone, and the hope, as you mentioned, was that this was a short-term problem, and that eventually in a matter of weeks or months, you would get some kind of outcome that would put us back closer to normal or the way that we were.
I mean, I think it's important to remember that going into April 2nd, the average tariff for the United States was just about 2%. So to go from 2% to what is currently an average closer to 20% tariffs is a huge change to the way in which we expect business to be conducted, the way prices are set, the way that consumers behave, all of that is now being adjusted, and although we're now six months into this process, we still have a lot of hope and optimism that it will all somehow go away in the near term, or at the worst, a couple of years, and then we'll be back to where we were when we started 2025.
Govindraj Ethiraj: Right, and let me take a step back, and I'm going to come to second-order impact as well, but how would you view global trade today? What were the other factors that were driving trade, including geopolitical, till we came to this specific challenge of tariffs in maybe not just the region, but the world as a whole?
Dr Deborah Elms: Well, we had pursued increasing globalization, which allowed firms, especially, to put slices of production, whether that was goods or services or investment, in what they assumed was the right spot for the location to deliver those goods or services or investment, and then produce products with supply chains that spun literally around the globe. Sometimes products would move across borders multiple times, could even have been dozens or potentially hundreds of times, depending on the product, before it finally arrived in the hands of the end user, and those supply chains were very carefully crafted. They were very responsive, actually.
We saw this during COVID, when we had incredible disruptions under COVID. Supply chains, more or less, were able to get goods and services into the hands of customers globally, even with tremendous disruption. We've had very complicated supply chains in place for a long period of time.
Those, though, are now under threat in a new direction, which is, again, from Trump's tariffs specifically, but also the reordering of supply chains more broadly to accommodate Trump's threats is creating all kinds of ripple effects. Supply chains that were working just fine, or that appeared to be working just fine in January, are suddenly needing to be completely readjusted as we move into September.
Govindraj Ethiraj: Right, and is there a glimmer of hope in some ways that companies, which is the private sector, is able to or will be able to respond more efficiently and suitably to this crisis as well, like it did in COVID?
Dr Deborah Elms: Well, there's always, especially in Asia, there's always people who want to hear the good news story. Please tell me the optimistic view. What are the opportunities that are ahead?
And obviously, anytime that you reshuffle, you have an opportunity for new experiences, new participation. Firms can plug into supply chains in ways that they didn't before. But I think that we're at a period, at least in the near term, that's going to be difficult to find opportunities because the volume of disruption is so significant.
And unlike COVID, where it was across the board, or more or less across the board, this is really emanating from one location and then rippling out from there. So I compare this to, you know, you throw a rock into a small wading pool, and the first reaction is the waves come out, but then they hit the edge of the pool, and then they bounce back in again, and then they ripple back out again. And in the meantime, you're throwing more rocks into the pool.
And so what had been a fairly either calm water or at least consistent waves, suddenly becomes extremely disordered. And it is hard to know whether in this moment you will be in a calm spot or whether there will be some enormous wave that just swamps you completely. And I think that's where we're at right now, which is why firms especially are so paralyzed.
Many of them have simply halted operations. They clamp down on internal spending as much as they can because they can control their own spending. They've tried to wait for better certainty.
They haven't pursued a lot of investment plans, but that only lasts for so long before you actually have to do something. So yes, there's certainly going to be opportunities. I think those opportunities are going to be few and far between during this period of extreme disruption.
But if you think back to my wading pool example, at a certain point, once you get enough rocks thrown in the pool, what were initially very large waves that are going out actually end up being relatively small waves because they're coming in all directions. And I think once we get to that point, it will be a little bit easier for firms to say, here are the opportunities, here are my specific challenges, and then accommodate those.
Govindraj Ethiraj: And as you look ahead, I mean, like I said, we've already lived with this in some form or the other for six months. It's more definitive now. If you were to look at the next six months to a year, the question really is now about second order impact.
How do you see this playing out, whether it's on firms, balance sheets, or trade policies from again, as you see it?
Dr Deborah Elms: I think we are entering this very different world in which you need to reconfigure your supply chains. And in particular, you're going to need to think very hard about how exposed you want to be to the U.S. market. There will still be an attractive market still by consumers and firms still buy things in the U.S. that they don't buy elsewhere. And they do a lot of it at price points that the rest of the world can't match. So there will still be trade with the United States, but I think firms will be thinking harder about, do we have to do that? And if we have to do that, then let's be realistic about the costs of doing so, the cost of engaging with the United States.
And if we can't engage with the United States, then we need to think about what we are going to do instead and pivot. The challenge with the pivot strategy, I think will be, and this is certainly going to be true across the next six months, as thousands or even millions of firms try to pivot, they will all be pivoting in similar directions. And so the competitiveness challenges that companies are facing is likely to get worse rather than better, especially in the next six months, because they will say, well, if we can't sell to the U.S., then I will pivot. Where will I pivot? I think the natural location will be Europe because that's the next closest alternative. Not everyone is going to be able to sell into Europe.
So then what? How else will we be able to find markets and find opportunities in other places where we might already have a modest footprint, but we could expand it where we've never explored, but now we should. And the competitiveness in those spaces is going to be sort of on steroids because everyone is going to be doing that.
And so I think for at least six months, we're going to have a lot of disruption ahead.
Govindraj Ethiraj: You know, one of the things that you mentioned in your article on napkin deals is the fact that the government or other governments do not have the same level of responsiveness or have not had it because of the way the U.S. government has moved, which in turn has moved so fast because they've broken several traditions and maybe not respected intra-agency lines and so on. So is this a new world that trade negotiators and trade departments of other countries should now be configuring themselves for? Or will this pass too in some ways?
Dr Deborah Elms: Well, I think, again, you're going to have a sort of split personality. There will probably be some kind of how we deal with the United States? At the moment, only the U.S. is pursuing what I call these napkin deals, which is, you know, about as durable and about as detailed as whatever one could put, you know, on the back of a paper napkin. So you'll have to have a strategy for managing that. You can make a lot of promises. They're going to be wide.
They're going to be broad. They're going to be high level because that's all it fits on a napkin. But you will also have to think about how do I create better arrangements with the U.S.? And so I think that second part has been very muted for the first six months. The speed is a problem. Governments don't normally move at speed. But as we move into this next six months and beyond, I think governments are going to be splitting sort of, you know, what do we do with the United States in one bucket?
And then what do we do with everybody else? I think in response to this crazy napkin deal environment, they will say, actually, we want to go in the other direction. We want to be as clear as we possibly can be.
We want to minimize the level of chaos and confusion that we have with each other. Let's start or let's activate or let's build on whatever existing frameworks we might already have. So there are, as good news, you know, hundreds of free trade agreements, for example, in different locations.
There are a variety of other ways that you can interact as governments with one another in trade and economic issues. Can we pull those out? Can we look at those more carefully?
Can we think harder about how to make sure that our firms are using existing other frameworks? Can we think about ways in which we might knit these together in coherent ways? So I think that's where we're going to be in the next six to 12 months.
So still deal with the United States. It will still be chaotic and crazy. There will hopefully be the beginnings of better coordination outside of the United States.
Govindraj Ethiraj: Right. Last question. And this is an Indian one.
So India is now looking at or rather has been hit with an additional 25% duty for importing Russian oil, which the United States does not want it to do because it blames it for funding Russia for fighting the Ukraine war, which in turn the United States is trying to bring to an end. Now, my question really is not so much the geopolitics of this because it's complex and maybe it's too complex, but how do you see this? I mean, the fact that there is a 25%, which is over another 25%, and whether this reflects any economic logic or for that matter, even political logic.
Dr Deborah Elms: The short answer to all of that is not really. So this is a novel use of tariffs, these secondary tariffs. It's never been tried before.
It's unclear what legal authority the president has in the United States to even impose this. Nonetheless, it exists. And in fact, Indian companies are having to account for it now in anything that they sell to the United States that is now subject to, as you mentioned, up to 50% tariffs on their products.
So we have to deal with that situation. But I think it's challenging on many levels. One, again, we don't know what the secondary tariff thing is exactly.
So it's unclear how you do that, how long it lasts, does it come to an end? If it comes to an end, how would it come to an end? I'm sure this is a question that Indian officials are asking Americans, what do we have to do to show that we are not buying enough Russian oil or the right amount of Russian oil?
Does it have to go to zero? How would we prove that? I mean, I think it's really unclear what would India have to do to have that 25% removed, especially if it's not just India buying Russian oil, but it's actually there is still a conflict going on in Ukraine.
So, you know, the conflict in Ukraine is somehow India's fault altogether. Then that's going to be a very challenging situation to fix. And hopefully, I mean, this is a tragedy for India to have to be dealing with this, but hopefully for the rest of the world, we don't see this expansion of secondary tariffs for whatever is the current problem that President Trump wants to address.
It's unclear how long this will last, how deep this will go, how challenging this will be to deal with. But I'm worried that at the moment, certainly between the United States and India, I see two sides that are setting themselves up for a prolonged challenge between the two sides so that we're not going to get rid of either the original 25% or the new 25% for the secondary tariff reason anytime soon. And that's deeply problematic for, of course, for India, for the U.S., but also for the globe. Because now, again, we are suddenly putting in another giant rock into the swimming pool, and we have to figure out what those waves mean for everybody else.
Govindraj Ethiraj: Deborah, it's been a pleasure. Thank you so much for joining me.
Dr Deborah Elms: Sure. Thanks very much for having me.
