Stewart McAndie: Good morning, good afternoon. I'm Stewart McAndie, a member of the Ashmore UK Client team. Welcome to everyone and thank you for joining us for today's Ashmore webinar: ‘India: Resilient Domestic Economy Amongst Global Trade Turmoil’. 

Today's webinar is for investment professionals only and not for members of the media. Also, if you have any questions, please enter them in the live Q&A box on your screen, and we'll address them at the end. Any questions we do not answer live, we'll follow up post the webinar. Today, we're joined by Rashi Talwar Bhatia, Ashmore's Head of Indian Equities, based in Mumbai, but she's over with us in London today, and Gustavo Medeiros, Ashmore's Global Head of Research, who I'll hand over to now to set the scene and ask the first questions. So, with that said, over to you, Gustavo.

Gustavo Medeiros: Thank you very much, Stewart. And thank you, Rashi, for coming.

Rashi Talwar Bhatia: My pleasure.

Gustavo Medeiros: For the audience, we are having an offsite over the next couple of days, and we have most of the Chief Investment Officers from across Ashmore, including from Jakarta, from Colombia, yourselves, and the team from Saudi. 

The fact that we have Rashi here again shows you how much she's a darling within Ashmore, and how much we really appreciate that there is a great opportunity in India. So I think it's hard not to start a webinar without talking about geopolitics, and the domino effect in global macro over the last two to three years. Of course, now you have the Indian-Pakistan conflict. So, would you be so kind to share your thoughts on the conflict, whether or not you think that this ceasefire that has been announced will hold, and how do you see the situation?

Rashi Talwar Bhatia: Thank you Gus and it's always a pleasure to be here in London. You know the India-Pakistan conflict and my views on it. I just want to preface, they are my views, and there is obviously a personal bias, and very proudly so, towards the conflict. 

But because I knew coming here, and I knew I was going to get questioned about this quite a bit, I did a lot of data collection before I arrived. One way to eliminate bias is to look at hard facts and differentiate facts from opinion. So one of the things that I think people do not realise is that an India-Pakistan conflict is not an equal measure conflict. The Indian economy is about 11 times the size of the Pakistan economy. We are close to a USD 4.5trn, whereas Pakistan’s economy is around USD 300bn. 

That differential being the case, even in terms of defence spending, is significant. I looked at this data over a 10-year period, and Pakistan’s defence spending is in the range of USD 8-10bn over the last 10 years, where India has been spending between USD 80-100bn over the last 10 years. So, in terms of just pure heft, of might, equipment and everything, they are really outnumbered.

Having said that, there is also a point that we cannot debate where India has in the past tried to follow international law and the UN Security Council. We've been subject to terror strikes on Indian soil multiple times and nothing has really come of it. So at this time when the first attack happened, the reaction was to take out the military group Jaish-e-Mohammed and the Lashkar-e-Taiba (LET) and the Jaish-e-Mohammed base camps, and these are global terrorist camps. These are not specifically Indian-only issues, and this  was not taken very well by Pakistan. 

We have a ceasefire right now, but I think prime minister Modi's words on Monday made it very clear this is a new paradigm shift for India where we have zero tolerance to terrorism. We have never said that before. We've been extremely tolerant to all kinds of terrorism on our soil. But now we get to a zero tolerance for terrorism. He also said nuclear threats are something that we will not yield to. So clearly there is thought behind that. 

Modi’s third point, which is very important, was that trade and terrorism do not go together. Blood and water do not flow together and the Indus Water Treaty is still in abeyance, which is a pain point for Pakistan and for the economy of Pakistan. I think these things are under conversation, as far as they're concerned. 

So from that perspective, it is a new paradigm. We are going to possibly have to learn to live with some amount of noise and activity on this going forward. The good thing is the economy's strong. We continue to grow in the region of 6.2 to 7.2%, give or take, each year. And when you have a strong economy, we are the fourth largest economy in the world, the ability to deal with this becomes slightly easier. We are spending USD 80 to USD 100bn a year, and we can afford to spend that much and that is going to continue. So from my perspective, I do not think it's business-as-usual (BAU),  I think this is a new BAU that we're going to have to get used to and maybe that's the way, unfortunately, the world is playing out right now.

Gustavo Medeiros: Absolutely. Thank you. I think the other reassuring point is that the US mediated this conflict and India has a willingness to keep on expanding its trade ties across the world, right? So, and yes, I hear your point. It sounds like this is politically much, much more important to the Indian government, to the Indians in general, than people understand. So this is likely to...

Rashi Talwar Bhatia: Sorry, the last point I didn't make, which was very important, and contained in our prime minister's speech, was that India is not going to differentiate between state and non-state actors in Pakistan. That means that if there is a terrorist attack, it is not a question that this is not state sponsored. That's a dramatic shift in terms of diplomatic relations. It's like, US and Iraq, for example.

Gustavo Medeiros: Okay, very good. Just to wrap it up, I think when there were dog fights between the two side’s fighter jets, the Pakistani stock exchange came down about 12%. By contrast, the Indian stock exchange was down one or two percentage points, right?

I think overall it's fair to say even given the very concerning escalation that we've had last week, the market seems to have looked through that, because of the pattern on how these typically tend to escalate over time. I think, as you correctly pointed out, the fact that you have such an asymmetry of forces between the two sides means that one side has to yield and hopefully that's going to lead to an era of more peace within that important region of India. 

But it's fair to say perhaps that's not been the key event for the market this year. There has been much more important events for the market that probably we should spend more time discussing, including things we've discussed in previous webinars. Then, we talked about how we really like the structural story of India and valuations were a little bit overstretched and we were trying to find places to be more defensively positioned within India to take advantage of a sell-off. I think since around October last year, we've had a meaningful correction both in absolute terms and also from some important peers like China, for example. We seem to have had a strong rebalance. Talk to me a little bit about valuations across segments at the moment, where they are.

Rashi Talwar Bhatia: So we did see a sell-off from October all the way to February-end, and the sell-off was sharp and swift. I think we saw about USD 25bn of selling from foreign institutional investors during that period. A lot of it is in the large cap space. The small and mid-cap sectors did see some correction, but rebounded pretty strongly in March and April as well. The large caps, however, have now reached a point where valuations are not looking as outlandish, they were never looking very outlandish, but the large caps are providing better comfort even as the quarterly earnings are starting to come through. 

I continue to be worried on the small and mid-cap side, because we've seen earnings cuts over there, but stock prices haven't really corrected. So, we are still at two standard deviations above in terms of multiples in that space. I would be cautious over there, and you know, when we are looking for mispriced opportunities in India, we are finding those mispriced opportunities more in the large cap space, where 80% of our portfolio is actually in the large cap space. Today we have less than 20% in the small and mid-cap space. Historically, it has been about 55% to 60% in large cap and 40% in the small and mid-cap space. So, to that degree I think we're in for a bit of a volatile year with all kinds of geopolitics playing out. 

Obviously, India-Pakistan was not what we could have predicted,  but volatility to that degree provides the correction that we sometimes need, and provides the opportunity to find mispriced stocks. I'm a little more optimistic nearly halfway through the year, to be able to find some amount of mispriced stocks and the themes that we like. We continue to look for growth in the sectors and the sub-sectors, and we still would like to own companies that have significant competitive advantages, and perhaps we shall get the right opportunity in the coming year.

Gustavo Medeiros: Very good. Well I can vouch for what you said. Since early to mid-March, our global equity strategists, and equity portfolio managers have been buying India as well after being underweight for almost a year, or slightly longer in some cases, due to valuation. So that, I think, corroborates what you're saying and is interesting to see. So, tell me a little bit more about the sectors and the themes or places that you like to invest as you find opportunities now.

Rashi Talwar Bhatia: Rural India continues to be an area of focus. We had a reasonably good monsoon last year and the early forecasts from the India Meteorological Department (IMD) for this year are that it will be about 105% of the long-term average. So that's a good monsoon. Two years of back-to-back good monsoon bodes pretty well for the agrarian economy and rural India has, you know, suffered much longer post COVID, but we've just about started to see green shoots of recovery come through. Obviously, there's been a lot of support by the government, a lot of teams that have helped rural part of country, so that part of consumption specifically is something we continue to like. We also continue to want stocks which are benefiting from that consumption, whether it be just mobility in rural India, whether it be girls in rural India that have had a certain handout from most states, and where does that consumption go in terms of staples, whether it be some amount of financing over there. So, these are places where we've been happy to be invested in as long as with the large private sector banks. Last time we spoke, there were areas where we had a large position and that's done extremely well for us over the last six months.

The current quarterly results have shown that in this kind of environment where asset quality is pretty good and the regulators' rules around asset quality are best-in-class, but the regulator tightening things in terms of operations and expenses hits the cost to income for all banks equally. 

But if you have the balance sheet size and the heft in your balance sheet, your ability to absorb those expenses is just easier, and does not affect you so much in terms of profitability. We've seen that play through, and the large private sector banks have always been better underwriters of loans and we are seeing that. So that's another place which we've clearly preferred. 

We've also liked a theme that I've spoken about in the past, which is India's seen a substantial increase in female participation in the labour force. In 2017-18, this number was 23%, but in 2023-24, it has jumped to 42%, which is the incremental female participation in the labour force. When that happens, when you see such a dramatic shift, and we've seen this in many western countries, UK being one of them and the US, there is a very substantial shift in consumption patterns also. 

As more women are stepping out to work, you have to make life easier at home because you're still doing the same work at home, but possibly need more electronic equipment in the kitchen, or you need food delivery, which is making your life easier on days you just don't have the time, or the time to sit and plan life as earlier. Mobility is a big one for women, with scooters growing pretty substantially in parts of India. Also, when women start to get income in their own hands, they spend more on themselves. We are seeing that with a substantial growth in beauty product sales in India. So, while normal staples are growing at say 6-7%, beauty products are growing at 20% plus, a serious dramatic shift. So yes, I think there's a substantial opportunity in areas where we're finding growth and at valuations that are acceptable to us, or at valuations where we believe there is more to be made.

Gustavo Medeiros: Very good, very good. You mentioned there was USD 22bn, right? Of foreign investor outflows?

Rashi Talwar Bhatia: 25 to 26.

Gustavo Medeiros: USD 25 to 26bn of foreign investor outflow. One of the factors that we were really worried about is that quite a lot of global investors, and also of our peers, had a very big structural overweight in India against China. We thought that as China started to outperform, there would be an unwinding of that. Now given the numbers, it feels to me that quite a lot of that unwinding is behind us, right? Can you put that in terms of like magnitude, how much does it account for? What is it, the percentage of total ownership of foreign investors?

Rashi Talwar Bhatia: Foreign investors own 60 to 70% of the Indian market, this is actually at decadal lows.

Gustavo Medeiros: Okay. So fixed income are largely disengaged on the equity market at the moment.

Rashi Talwar Bhatia: I think that what's happened is that foreign institutional investors sold-off India to the point where ownership was at decadal lows at about 16, 17%. And from here I think the whole potential India-to-China shift, with China starting to rally, is done. 

From here, what we really need is emerging market flows, and emerging markets starting to get more money. I think – being an emerging market house – that with the rally that the US has seen, EMs have been the poor stepchild over the last five to six years. Hopefully that change is going ahead and that money will now flow into India equally. 

It’s not that there's going to be a preference for China over India. I think India, the overweights have been cut. I think, more importantly, what we are seeing, and it's clearly something that is visible at our end, is that we have more India-only mandate request for quotes (RFQs) coming our way. People are starting to want to invest, with India being a USD 4.5tr economy, and obviously get to a point where they want to have that exposure and not necessarily club it in with other EMs as well. So I think it's going to be a mix of both. And having said that, at least I believe that trend is here to stay.

Gustavo Medeiros: Very good, very good. So the only potential overhang as you've highlighted already is the retail investor overexposed to small and medium cap, right? Which has been another theme, which seems to be so because if earnings are declining and stock prices have bounced back fully, this is not...

Rashi Talwar Bhatia: No, not the best.

Gustavo Medeiros: The numbers that we've seen before suggests that. But I think that of these two overhangs that you had, one is definitely out of the way, actually our own funds again corroborate that. We actually now like both India and China. We're trying to play both from the overweight side, I would say across both of our strategies. But again, as you pointed out, you have to be careful in some of these parts of the economy and some of the parts of the market that have been too concentrated in terms of retail. Taking on a 'batty' retail casino mentality, gambling, get rich fast, that kind of thing.

Rashi Talwar Bhatia: Oh absolutely. I think some part of that was tempered with the drawdowns that some of the funds and the retail markets saw in January and February. Through March and April, things seem to have come back up, and that's a worry, I won't lie to you, that's a worry. It's an area I will hesitate to tread right now. And you know, I can't tell you when that will correct, but all I can tell you is ideally it will.

Gustavo Medeiros: Yes, two observations to make just on your last thoughts. First, when India trades in line with the average valuations over the last 10 years, that probably is very attractive – particularly in the large cap space – because this is a country that has the best fundamentals in terms of infrastructure development, demographics, financialisation…

Rashi Talwar Bhatia: All of it. Absolutely.

Gustavo Medeiros: And you know, structural reforms, it's on the right side of the geopolitics apart from the conflict of Pakistan. And even on that, well you can see that it's being backstopped relatively quicker because of how important India has become, right? So I think that is an extremely attractive opportunity. But it feels to me that US exceptionalism is definitely over. I'm sure every single person that dials into this call or listening to the replay, has seen my piece on 31 January, the inconvenient truth behind US exceptionalism in all April cyclical fiscal expansion sugar rush, and right now you don't have the ability of keeping on this operation of expanding the fiscal deficit. That would be a relatively benign way for it to happen, right?

If the US tries to expand the fiscal deficit, we're talking about the potential debasement experience here. Which would be very disruptive within quarters or years. And I think US Treasury Secretary Scott Bessent understands that. Right now, 80% of the investors and 100% of the sell side believes you're going to have a fiscal expansion. The discussions in Washington suggests some of that. I think Scott Bessent has been very focused on trade. He's going to come back as an ‘adult in the room’ and he's going to try to bring some rationality to the budget as they come. If that happens, you're going to have a benign, most likely, end of US exceptionalism. That's the best path to hope.

Nevertheless, based on both the India story and this story I'm talking about now, the global macro space on how the US exceptionalism is going to end, because it's already ending in front of our eyes. The question is, is it going to end in a very volatile way because of bad policies, like the initial trade bad policies, or in a benign way, you're going to have volatility, you pointed it out already in the interview. How is your strategy, how is your fund positioned to actually weather this volatility in 2025 and actually maybe potentially take advantage of it?

Rashi Talwar Bhatia: Gus, we are really focused on the Indian domestic story. In terms of our exports to the US, goods exports are less than 2% of our GDP. Our imports are less than 1%. So really at this whole point, the idea was there was a lot of noise. I think part of the reason you never saw a reaction from India per se was materiality. 

And what India actually has to worry about is the second order impact. Like you said, what happens, how does this play out through the US? Do we really go into a recession? And if we go into a recession, does this cut the budgets of the companies, and therefore cut the budgets of IT spend, that affects our IT services companies? 

Then there is a third order impact. I mean, we've come to some agreement with China, let's see how that plays out. But even with a 30% tariff rate, do we see China dumping some of their goods in other markets of the world, potentially India or potentially other parts of South Asia or Africa where India exports, and the other smaller companies of India send their exports to? 

These are things we really do not understand at that stage and we need to figure it out as we go along. It's a very uncertain time. So we've really chosen to focus on the domestic story and, like you mentioned with a population of 1.35 billion with the demographic pyramid in our favour, you know – one of the few places in the world where the demographic pyramid is in our favour – the consumption story and finding these unique consumption stories like the female participation in the labour force growing and all of that is still there for India. We're still growing at 6.2%-6.3% in a year after we've cut GDP numbers by over 100 basis points. So, India will still probably be one of the fastest growing countries out there.

So the point here is to find things where there is a comfort in terms of some valuation metric where we find some price dislocation in the markets because of the volatility and then choose to buy those stocks. Will we possibly look to get into the smaller cap space if there is a correction? Absolutely. And will we look to possibly look at the more export-oriented stocks as this plays out? Absolutely. 

I think as this plays out, we might get the opportunity with the volatility that is there, but as of right now we are more domestic-focused, large cap private sector banks, domestic consumption, discretionary, a small bit of rural facing staples, and that's how we are choosing to play this right now.

Gustavo Medeiros: Intuitively, those are sectors that also outperform if you do have more volatility, right, and are two ways in which the overhang on retail can wipe out also in a benign way, if it's done within a reasonable market frame of a bull market, or a market that is sideways. Or in a very bad way if there is a de-leverage because of a more volatile environment. Either way, your portfolio should actually be well positioned to take advantage of that. That's great. That's fantastic. And the female empowerment story sounds very exciting. Even I can imagine the growth on that sector, on that space, is going to be a multiple of the growth on GDP because the participation rate has doubled, in less than 10 years' time.

Rashi Talwar Bhatia: And we've seen that inflection in all the developed markets, whether it be US or UK. When you go from that 23% incremental participation…

Gustavo Medeiros: Saudi Arabia more recently.

Rashi Talwar Bhatia: Exactly. And in India we are seeing that now. So we are seeing all the product stuff that I mentioned, whether it's electronic items, mobility, beauty products, and beauty products are growing at 3x of GDP and I think that's the whole idea.

Gustavo Medeiros: 3x GDP sounds great. Stewart, any questions from the audience so far?

Stewart McAndie: There is one actually, as a follow on to the current positioning. It's in reference to the valuation discipline and the macro input into your strategy. You mentioned it being currently 80% large cap. Can you put that into context in terms of where you've been in a max, and where you may get to over the course of this year if you do see those opportunities?

Rashi Talwar Bhatia: Stewart, the fund does not have any guardrails. We can be 100% large cap and we can be 100% small cap, as per what is set out. But I don't think we're going to get more large cap. I think this is the max of where we are. The 20% small cap stocks that we do own are stories we really like, where we see companies have competitive advantages and a right to win, as well as seeing price dislocation. So I think we are going to continue with those, ideally where if we see the market correct, I would possibly look to pick up a few more small and mid-cap names when that happens. 

If you look at our history, and we've been managing this strategy for a long time, we usually average the small and mid-cap positioning at 40 to 45% of the fund, which is currently about under 20. I think we will get back to that. Will it be six months, a year, 18 months? I don't know.

Stewart McAndie: Great, thank you. Well obviously, over the course of the last year that macro positioning has added some significant value. So thank you both, Gustavo and Rashi, for your time today and to all attending, thank you again for joining today's webinar. If you have any further questions, or would like any follow up information, please contact your local Ashmore representative.