Daily Voice: US trade deal lifts mood, but this MD says earnings are the real trigger

Raghvendra Nath is the MD at Ladderup Asset Managers

• Trade deal brings a good shot in the arm for Rupee
• RBI rate cut without effective transmission may not be helpful at this juncture
• Market currently in a bear phase following a four-year strong bull run

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Raghvendra Nath, Managing Director at Ladderup Asset Managers, said the recent US trade deal has improved sentiment, but warned it is unlikely to be enough, by itself, to spark a meaningful market rally.

A sustained upmove, and a return of meaningful foreign institutional investor (FII) inflows, will depend on clearer signs that corporate earnings are turning and that the broader macro environment is settling, he said.

Nath also argued the market has slipped into a bear phase after a strong four-year bull run, suggesting the process of stabilisation could take time.

On the Reserve Bank of India’s upcoming monetary policy decision, he said a rate cut may not do much at this stage unless it is accompanied by effective transmission into lending rates.

Do you advise adding export-driven sectors—which were not favourites for a long time—to portfolios following the India–US trade deal?

After months of uncertainty, during which the US imposed tariffs of around 50% on India, affecting major export-driven sectors such as textiles, apparel, and chemicals, a reciprocal tariff of 18% does provide some relief. While the markets have welcomed the move by moving up substantially on Monday, we must understand that it is just a return to the status quo and had to happen sooner or later. Both US and India need each other not only for trade purposes but also for geopolitical and strategic considerations.

In the short term, all such companies that were affected by the deadlock shall now benefit, and therefore, this should reflect positively in their stock prices. In the long run, the companies have to compete for market share with global competitors as India was one of the last ones with whom US has done a bilateral deal. While one may look at adding some of the stocks to the portfolio, it is important to have realistic expectations, as the news is already built in the prices to some extent.

From the macro perspective, the trade deal should benefit the exchange rate as the uncertainty comes to an end. It also helps with the reduction of trade deficit to some extent. Let us see the fine print of the deal as India is also being forced to import certain goods from United States and therefore, we have to see how the trade deal will pan out in the next few years.

With the India–EU deal last month and the India–US deal now, do you expect these developments to further accelerate India’s role as one of the world’s major growth engines?

India already has trade deals with almost all the large nations, so the India–US or Indo-EU deals by themselves are not something that will have a dramatic impact on the trading volumes. Most countries today are moving toward bilateral arrangements to protect their interests, and India, being one of the world’s largest economies, is naturally doing the same.

The trade deals help in removing the administrative and duty bottlenecks. But ultimately the export competitiveness of our products needs to be maintained in relation to the competing nations for us to substantially benefit from these deals. If Indian companies are competitive relative to other countries, exports will grow; otherwise, agreements will remain largely on paper.

Trade deals between the governments can facilitate trade, but they do not decide where the buyer’s source from. For example, in the last 10 years, the textile sector has been dominated by exporters in Bangladesh, Sri Lanka, Thailand, Vietnam etc. and the Indian exporters have seen reduction in market share. The government therefore has to bring in more policies and ease of doing business so that exporters from India can increase their market share of global trade.

In addition to these favourable factors, do you think one more RBI rate cut could be the sweetener that foreign institutional investors (FIIs) are looking for?

A rate cut without transmission may not help at this juncture. While the US-India deadlock over the trade deal and a depreciating INR did contribute to the FII outflows, the period has also coincided with flattish earnings growth as well as high valuations of India stocks relative to other countries.

Therefore, a rate cut alone does not suffice. Any foreign institutional investor would look at the bigger picture where the GDP growth is robust, demand is strong, earning growth trajectory of companies is positive, the USD-INR is stable and not volatile, and the policy environment is conductive.

Another RBI rate cut would help a bit by easing liquidity and lifting sentiment, but meaningful FII inflows only happen when investors can clearly see earnings starting to improve and the overall macro picture becoming more stable.

Do you feel this is shaping up to be a “Diwali celebration” phase for India? Do you expect any significant FDI announcements in the coming months?

I think it is still too early to celebrate because of a single event. Of course, the announcement of the trade deal has brought some cheer to the markets after the STT (Securities Transaction Tax) shock that jolted the markets after the budget speech.

The market sentiment right now is negative for multiple reasons. Earning upgrades are few and the earning growth at the aggregate level is still subdued. The valuations therefore still look expensive. Trading volumes have reduced as the retail investors, especially the newer breed that came in during the last five years, are losing patience and reducing their equity exposure.

The gold and silver rally has shifted some of the speculators from Equity markets. Higher STT is likely to impact high frequency traders reducing volumes further. So, in the next few months the markets may continue to trade sideways.

However, there are a lot of positives too. More money in the hands of government employees due to the pay hikes, more money in the hands of retail investors because of income tax and GST cuts, focus on manufacturing improving the job market, government’s capital expenditure remains strong, the government’s path towards fiscal consolidation improves the macro environment and many others.

Has the deal helped the market form a strong base and positioned it for a sharp rally in the coming days, or will it wait for earnings to improve?

The trade deal has lifted sentiment a bit, but on its own it is not enough to trigger a big rally. We are in bear phase right now after a 4-year strong bull run. And it may take time before things settle down. The bull run that we saw in the past was supported by sharp growth in corporate profits accompanied by huge growth in trading volumes.

Right now, corporate profit growth has largely flattened over the last five to six quarters, and this quarter does not look very different. On the retail side, many new investors who enter the market do not have the capacity to hold or patience if they do not see returns for a year or two. That is already showing up in lower trading volumes in recent months.

On top of that, a lot of speculative money has moved to commodities like gold and silver, pulling activity away from equities. When you add weak sentiment and FII outflows to this, it explains why markets are struggling to move meaningfully. So, while the trade deal helps sentiment in the short term, a sustained rally will only come when earnings and fundamentals improve.

Is the deal a major positive for the currency, which had depreciated to around 92 in January?

In fact, this is one of the biggest positives from the trade deal in the immediate term. Indian Rupee has been under tremendous pressure over the last 6 months and has been one of the worst performing currencies in the world in the last year. Repeated RBI intervention has failed to arrest the slide. The trade deal brings a good shot in the arm.