Stewart McAndie: Welcome, everyone, and thank you for joining today's Ashmore webinar entitled: Addressing the Pause in India Outperformance: The Way Forward From Here. So today, we have Rashi Talwar Bhatia, who's Head of Ashmore’s India office based in Mumbai. She's responsible for managing our EM Indian equity mandates of about £2.7 billion. We've also got my colleague Andrew Ellis, who I'm going to be handing over to now, to ask some questions to Rashi. So over to you, Andrew.

Andrew Ellis: Thanks, Stewart. Good afternoon, good evening, everyone. Thanks for that. Rashi, hi, how are you?

Rashi Bhatia: Hi Andrew. Afternoon there, I'm guessing, yes.

Andrew Ellis: Yes. All good, I hope. Look, we've got a few things to discuss. We've got a little bit of time, so I'm going to go straight to the point, if I may. I guess the starting point is that obviously 2025 was a big disappointment from a performance perspective for the India market, and I just wonder whether you can elaborate a little bit on what you think were the defining factors behind that. Were they mainly international events that were impacting general investor sentiment towards the market, or was it more domestic oriented? What's your take?

Rashi Bhatia: Great question, Andrew. I think 2025 was the perfect storm of sorts when it came to India. We saw a whole bunch of external geopolitical factors that affected the markets as well as domestic, I don't want to say mismanagement, but the central bank just not reading the situation in the best manner. 

So, towards the end of 2024, the central bank didn't raise rates by as much as they should have compared to what the US Federal Reserve (Fed) was doing. As a result, the ten-year between the US and the Indian markets narrowed to 182 basis points, which is the narrowest it's been in forever. At the same time, the Reserve Bank of India (RBI) continued to protect the Rupee and as a result the liquidity from the system got sucked out towards the end of 2024. It was very visible at that point that growth was going to start to disappoint, and earnings were going to disappoint from a very elevated level or from very elevated expectations. And as that was happening, the valuation multiples, which were already about one standard deviation above average for the large caps, would look higher and therefore you would see some amount of correction in the market. So, some amount of time correction in the markets, which would lead to the point where multiples would actually adjust down. That's exactly what happened. 

So, because of reasons like that, 2025 saw a disappointment in growth. The tariffs, or the announcement of "Liberation Day" didn't really help the markets and the uncertainty or the delays in getting the US-India trade deal signed, continued to push a recovery further down the road for the Indian markets in 2025. 

And this was on the back of, I wouldn't say lofty, valuations, but valuations closer to the ten-year averages versus the rest of EM, which was obviously pretty low in terms of the valuation number. So, I think a lot of these factors led to the underperformance in 2025.

Andrew Ellis: Okay, that's helpful. But no hiding from this, as we've gone into '26, obviously conditions have moved on a little bit, have changed and evolved, but yet the market is still underwhelming performance-wise. Can you put your finger on some of the factors at play just now?––

Rashi Bhatia: Andrew, there's just so much noise at this point of time globally, geopolitically, AI. India being on the wrong side of the artificial intelligence (AI) trade while we don't have a lot of the big AI companies that are hitting new market caps every day. We have a lot of the tech companies, which are supposed to get hurt as AI comes in and AI makes coding way more efficient that you don't need as many coders as India does have, right? Or as Indian companies have. 

One has been a lot of worry on that. Obviously, the geopolitical drama around the world hasn't helped. The Rupee has depreciated, and  that has scared a lot of foreign institutional investors as well. We've seen over the last 14–15 months unprecedented selling from foreign institutional investors. So much so that I think for the first time in India, the domestic ownership of Indian stock market ex-promoters is higher than the foreign institutional ownership. So, we've had some of that. But I think a lot of this is now towards the end, because as we know, when the pendulum swings, it always swings from one extreme to the other extreme. So, we've reached the other extreme, and I believe now we should see some reversion to the mean.

Andrew Ellis: Okay, thanks, Rash. That's helpful. Let me just spin the clock back to this time last year. Again, your outlook and your view on the market this time last year was pretty downbeat. And by the way, I think that proved itself right in terms of the performance and the evolution of the market we saw last year. In contrast this year, despite the backdrop you've described, you and the team seem pretty upbeat, pretty positive in relation to this time last year. I'm just wondering what you can tell us in terms of the factors influencing the evolution of your thesis within the team.

Rashi Bhatia: So yes, you're absolutely right, Andrew. I was pretty downbeat starting 2025 because I thought there were lofty expectations from earnings and the market, which were going to disappoint. But what started to happen in February is that we realised that the government has realised exactly what we did, that the central bank sucking liquidity out of the system – because rates should have been raised and weren't, and you had a currency which was defended, because they didn't want it to weaken – affected growth. To the degree that by January and February, the government and the central bank were both really nervous on growth.

As a result, the 2025 budget started off with a pretty hefty indirect income tax cut for most people. So, in India now, if you're earning anything in the tune of $13–$14,000, you will not file taxes, you don't pay any taxes and you do not file taxes. That's a pretty large number that covers a majority of the population of the country. 

This was a big start. We realised that somewhere the government had realised the mistakes that had been made and wass trying to put in some fiscal incentives or tax cuts to revive demand. We also saw the central bank cut rates. Not only did it cut rates, but over the course of the year, we saw the RBI cut the cash reserve ratio which injects liquidity into the system by nearly 100 basis points over a period of time. And we continued to see smaller fiscal measures through the course of the year, and in September, we saw a pretty large direct tax cut, which was the goods and services tax cut, which came in timed just ahead of the festival season. 

The team and I read the tea leaves earlier last year, where we figured that while growth had disappointed and the government and the central bank had realised it, they were going to keep nudging, pushing the economy until it started to roll again and started to move faster. So, we started to move the portfolio to be more domestic focused somewhere along the beginning of last year, March, April, May, and with a large part of this consumer discretionary and a large part of financial leverage or retail-based financial leverage. 

Now, with anything like this, you don't know when demand will start rolling. Like I said, it's a large economy. You keep pushing, you keep pushing, and then suddenly you get the momentum going and it starts rolling. We've started to see that happen after the goods and services tax cuts that came in towards the festive season in September and October last year. I am far more positive on the domestic economy growth prospects. I think we've seen upgrades come in for GDP growth. We've seen a lot of the consumer names talk about revival in domestic demand. So, we're very positive on the domestic demand front and domestic consumption makes up 60% of Indian GDP. So that's what makes us pretty positive on it. 

We continue to be a little worried on the tech side. We're marginally underweight that space. So that worry hasn't gone away. I believe not all Indian tech companies are going to hurt. There are going to be some on the side of working with AI companies to get processes and databases all in form. Some of them are going to be at a point where they are going to see deflationary pressures on their business. The question is to be able to pick which one benefits versus the ones that don’t. 

So, from that standpoint, I'm far more positive on the Indian markets today. Earnings growth, which disappointed last year is on the trajectory to surprise of this year. Valuations are far more moderate at about, you know, 19–20 times one-year forward earnings, which is, more or less in line with the ten-year average of where India has traded. So therefore, I feel it's a great time to add into the Indian markets and there are stocks while the broad market is at 19–20 times, but the volatility that the global markets have created and geopolitics has created is giving the opportunity to find bottom-up stock picks which are trading well below their ten-year averages or trading at attractive valuations.

Andrew Ellis: Thank you. That's super helpful. You've always run a pretty high conviction portfolio. I wonder if you can elaborate for the viewers’ benefit how you're reflecting your views right now in terms of portfolio positioning and construction. Has that changed? Has it evolved? What are the areas in which you're seeing the best opportunities right now?

Rashi Bhatia: From a 12-month perspective, so looking exactly 12 months from where we were in January and February 2025, it's a dramatic change because just about this time last year, we started to move the portfolio around. From being overweight tech at that time, we're now underweight tech and we're exhibiting the conviction that we have in the domestic economy with our overweight in financials. 

Most of this overweight in financials is in domestic lenders that lend to retail in some form or other, whether it's the large private banks that have a large retail portfolio or whether it be specialised non-banking financials that are doing some specific kind of retail lending. That's now a large part of our portfolio. So is consumer discretionary, beneficiaries of the increased liquidity and the tax slab rates moving up. And lower end demand for things like two-wheelers, etc. is also making a play in our portfolio. We continue to own some of the large platforms for commodity exchange or beauty products, which are also great places to be. 

Like I said, we still are underweight tech though we've reduced it a bit, but we've got a very non-consensus view there, or very different view there, where we really don't have much of the large players or the larger names in the tech space. We are trying to build conviction on firms we believe will move along this AI path, or to the future that we are seeing. 

And then we have a few tactical bets that we've taken over the year for stocks that essentially would benefit from a US-India trade deal, because they have been hurt by the 50% additional, 25% tariffs and 25% additional tariff, for Russian oil. These were specific exporters to the US when demand has really gotten beaten down and our belief is a trade deal will come. It's just a question of time, and it's just a question of going through the motions to get the trade deal there. So, some names in the tyres and the chemical space which are specifically beneficiaries of the culmination of a deal. So that's how we're expressing our conviction in the portfolio.

Andrew Ellis: Thank you, Rashi. I guess it would be remiss of me not to ask in concluding, as you look back and think about the outlook as you've just described, what are the things you would regard as being risks on the horizon that could upset the thesis you've laid out and how would that affect thinking as you move forward through the year?

Rashi Bhatia: Well, you know, Andrew, the risks in India, there are a few and it's constantly the same ones, right? One is obviously inflation hardening. While a lot of people have been talking about nominal growth being lower in FY27 versus what we've seen historically because of lower inflation. In the last RBI Monetary Policy Committee, we saw the central bank come in and take their inflation estimate up for FY27, and I believe they're absolutely right in doing so. 

Like I mentioned and listed out all the fiscal and monetary policy measures that were put into place in FY25, these are all inflationary to some degree, they're not deflationary. So, the current inflation trend of around, you know, 1.92% that we're facing is not going to remain at this level. My hope is it goes up to the 4-5% level, which is what India's traditionally used to, and stays there. But if it starts to go up further beyond 6%, then we know the central bank will start to raise rates again. And, you know, that's not a place we want to be right now. 

The second big one is always energy, right? For an economy of our size, we're the fourth largest economy in the world, swiftly moving to become the third largest economy in the next two to three years, but we do not control our own sources of energy. And that's got to be one of the biggest risks the Indian economy runs with. I don't know how we can really solve for that and even if we can, there's no immediate solution to it. 

AI is the other one. While we are far more insulated from these AI global shocks because we didn't benefit from the trends. So, if we didn't benefit from the trend, we can't really hurt when all these shocks happen. But the bubble keeps becoming bigger and if there is some kind of six sigma event on that front, it's not like we will be unscathed from it. 

So, these are the main things that are our worries when it comes to India. But I'm far more constructive on our outlook than I have been probably in the last 24 months. I think some amount of scepticism is good and maybe last year was a year of consolidation for the Indian markets, which is also extremely healthy.

Andrew Ellis: That's really helpful. Thank you very, very much for the summation. I appreciate that, Rashi. I'm going to, at this point, hand back to Stewart who I think has got a few questions that have come in. Is that right, Stewart?

Stewart McAndie: Correct. Thank you both. Rashi, there was a question. You mentioned broad markets trading on 19–20 times forward earnings. Could you break that down a bit for us? I know that you've been quite vocal and certainly your positioning has reflected that in terms of moving from small-mid caps to large caps. Can you maybe give us a bit more of a feel for how valuations are looking across the different cap structures?

Rashi Bhatia: Yes, sorry, I misspoke. The large caps are trading 19–20 times, the mid and the small cap are still very expensive. They're still trading comfortably one standard deviation above their ten-year average and way ahead of the large cap multiples. So yes, I continue to be more varied on the mid and small cap names. They've corrected. There used to be two standard deviations above. So, we've seen them come down to about one standard deviation above. 

But when that happens, you have some names that continue with really lofty valuations and some names that have corrected quite dramatically, down 30-40%. So, you're starting to see that happen in the mid and small-cap space. As you know, some of them are disappointing on, say, earnings or rationalities coming in, but it's an area where the portfolio, which is multi-cap or a flexi-cap portfolio, still continues to be very large cap oriented at this point of time. Having said that, it could be completely different a year later if we see a reasonable correction in the small and the mid space.

Stewart McAndie: Thank you. There's a question specifically about where were you positioned in terms of small and mid-cap at the peak and where are you now in terms of large cap, mega cap?

Rashi Bhatia: So, in terms of small and mid-cap peak at any point of time, we would've been about 45-55% large cap, 45% small and mid. And as of today, we are actually about 80-85% large.

Stewart McAndie: Fantastic, thank you. There was a question specifically about retail inflows which you alluded to. Maybe you can clarify if you've got any more numbers about how international investors and retail inflows or retail flows compare.

Rashi Bhatia: So, we've really been seeing about $3 billion of retail inflows every month. Every month. And this is, coming through the domestic institutions where a lot of this is small monthly inflows that households are making into the market. These tend to be reasonably sticky and it's an indication of the financialisation of savings in India. So, we're seeing a lot of that come through. This number is reasonably strong and will continue and has actually given the market a lot of depth to absorb the level of foreign selling that we have seen.

Stewart McAndie: Great, thank you. Thank you very much indeed for your comments and questions, Andrew. And to all attending, again, thank you for joining today's Ashmore webinar. If you have any further questions or would like any follow-up information, please contact your Ashmore representative. Otherwise, we will look forward to speaking with you again very soon. Thank you.