What is your view on Indian equities?
I think it’s important to differentiate between the short and long term. Because in the short term, India is probably the only market trading near its all-time highs and certainly showing the potential to go higher. Of course, it has been consolidating for quite some time. But when you are at or near new highs, the valuation components start to make things look more expensive. So, when you are looking at valuations, India is overvalued on a relative basis compared to pretty much anywhere else. In the short term, the challenge is if there is enough momentum to push through toward new highs. The challenge for a lot of investors in the US looking at India right now is the dollar component. The dollar has weakened a bit in the last six weeks or so but overall, it’s been doing very well. So, in the near term, I would not be surprised if there’s a bit of a pullback in the short term, but overall, the long-term thesis and potential remain very constructive.
You mentioned the dollar could be turning. What does this mean for the Indian market?
The dollar has made new highs every month in 2022 until October. In other words, that was the first month where it did not make new highs for the year, which I think is potentially an important data point to remember. So, recognising the fact that the dollar has gone from making consistently higher highs every month to putting lower lows. I think this rotation could prove meaningful. So there is a thesis where you have a weaker dollar which opens the commodities to go higher. The combination of a weaker dollar and stronger crude oil would propel India to new highs.
What are the Indian stocks on your watchlist?
I run the scans, after doing my macro discipline, to look at stocks making new three-month highs and three-month lows. So, when I look at the Indian markets, I think of two different buckets that seem attractive. One is the more established uptrends. Other is the rotating or the basing pattern. Something that is consolidating and starting to rotate, indicating new buyers have come in.
comes to my mind. It has been in a downtrend, stabilising and then breaking on the upside. Reminds me of the industrials charts or bank charts in the US that had a similar pattern. Charts in the more established names like also draw my attention. It was in an established uptrend but pulled back in the short term. In baseball terms, it’s like a fat pitch chart. And those kinds of charts, statistically, over decades of data in any market tend to give the best returns. And it looks like Sun Pharma has just come out of that phase.
What is your advice to investors in India?
Don’t confuse brains with the bull market. When everything is going up, it is easy to get complacent and feel like you are an expert stock picker. When everything is going up, that is not your skill, it is just exposure to a very strong market. And all large losses start with small losses.
What are the risks to the bullish scenarios?
In 2022, Indian and US markets became unusually disconnected. The conditions in the US are so bad because we are in the midst of a recessionary period and the inverted yield curve is the best possible indication. Even then, the S&P has had an orderly decline. But if conditions accelerate to the downside, you could see investors being risk-off in equities, and this could affect the Indian markets.
