Daily Voice: Why Marcellus’ Pramod Gubbi isn’t betting big on the US trade deal

Pramod Gubbi is the co-founder of Marcellus Investment Managers

• Given low base, double-digit earnings growth seems very likely
• All eyes will now be on recovery in the earnings cycle to justify current valuations
• After trade deal, manufacturing exports might see some incrementally attractive opportunities

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Pramod Gubbi, co-founder of Marcellus Investment Managers, said the US trade deal may lift sentiment, but its real impact on the broader economy and corporate earnings, outside a few pockets, looks limited. Ultimately, he told Moneycontrol, foreign investors chase relative value in valuations and the durability of earnings growth.

That puts the spotlight back on an earnings-cycle recovery to justify still-elevated market multiples. He added that manufacturing exporters could see incremental opportunities as trade agreements take shape.

What was your first reaction to the India–US trade deal? Is this the major catalyst the market was waiting for after the India–EU deal and the Union Budget?

It was a pleasant surprise indeed as most market participants seem to be prepared for a protracted period for the deal to come through. I don’t know what the market was waiting for but this has the potential to turn around what was looking like an entrenched negative sentiment driven by weak nominal GDP, weak earnings, depreciating rupee resulting in muted returns and a stark underperformance relative to the rest of the world.

With this deal in place, do you think FII money could start flowing back into Indian equities?

Whilst the deal does help sentiment, actual impact on overall economy and corporate earnings (barring specific sectors and stocks) seems limited. At the end of the day, FIIs look for relative bargains in valuations and earnings growth prospects.

Whilst the relative underperformance has somewhat reduced the valuation premium for India versus other markets, FIIs will look for a bottoming out of the earnings cycle and the rupee arresting its fall.

Is the deal incrementally positive for small-cap stocks?

Small caps are a large and diverse category of stocks. Some of the beneficiaries of the trade deal are indeed small caps, but it would be stretch to say it is positive for small caps as a whole, many of whom are exposed to the domestic economy and hence not direct beneficiaries from the deal.

Do you expect the RBI to maintain the status quo and focus on liquidity management in its policy meeting later this week?

Yes, given the rate cuts so far haven’t been transmitted yet, as liquidity has been tight keeping market borrowing costs elevated. However, the deal can help ease the liquidity in some sense as prospects of an export boost and a reducing current account deficit can help with the balance of payments and the rupee weakness. If foreign flows return, it will help liquidity management that much more.

Following the deal, do you believe the equity market has now formed a durable bottom?

It is futile to predict short term equity market movements but like I said, the turn in sentiment the deal brings is helpful. All eyes will now be on a recovery in the earnings cycle to justify current valuations which still somewhat elevated.

With most major news already priced in, do you think the key challenges for the market are behind us?

Besides earnings, the volatility in the global environment around rising government deficits in the west and the resulting currency debasement coupled with persistent geopolitical uncertainty mean that challenges are unlikely to go away anytime soon.

Which sectors would you look to add to your portfolio following the India–US and India–EU trade deals?

We are bottom-up investors. So, we shall reflect the deal implications in our assessment of earnings expectations of specific companies and if the valuations of such companies show a margin of safety, we would look to add to them. Manufacturing exports will be an obvious area where we might see some incrementally attractive opportunities.

Are you confident that India can sustain around 7% GDP growth and deliver double-digit earnings growth from FY27 onwards?

We are less fussed about the exact level of GDP growth as much as the direction. If we see stability on the external sector and hence the currency, transmission of monetary policy should mean we are headed in the right direction.

As far as earnings growth is concerned, given the low base, double-digit seems very likely. But valuations are demanding of more, perhaps closer to mid-teens which is likely but not a given by any assessment.