Rahul Chadha, Founder & CIO, Shikhara Investment Management, highlights investor concerns about India’s economic slowdown. The expectation is for urban recovery by the third or fourth quarter. Rural recovery is underway, aided by earlier rate cuts. Unsecured lending’s impact on household savings is a concern. Regional markets offer value due to corporate governance improvements and reforms. Market performance should improve with these recoveries.
Chadha says historically, it was seen in 2016 or 2019 that when a global recovery happens, the north Asian markets typically outperform India and India catches up in the subsequent year.
Nasdaq was lower by more than 2% on Friday. So, quite a knock coming in there. There is uncertainty about the authenticity of the jobs reports and lots of comments on that front. How are you seeing Wall Street shaping up and what exactly is spooking that market right now?
Rahul Chadha: We have seen a sharp rally in the market in the last two months and some pullback was natural. August and September historically are not great months for markets and also now that the tariff negotiations are nearly done, the market is waiting for some clarity. What does it mean for the pressure on US consumers and the consumer earnings? What does it mean for business investment?
Obviously, the payroll number spooked markets, but when you sit back and reflect, the last three months were most uncertain and typically in uncertain times, people freeze hiring. Also the AI-led productivity gains are coming through. Both these are working on the minds of business owners, managers, etc and so it was natural that payroll would be a bit off.
We are also closely watching business investment. The new Trump bill, the infrastructure bill which the Trump administration has passed, reduces the tax outgo by close to 8% by front ending a lot of these exemptions. That should be positive for rekindling investment back in the US.
Lots are happening in India as well. We are pretty much close to oversold. We have turned negative for July. Nifty has seen a 900-point fall from the recent highs and we have been declining for five consecutive weeks. There is still that question mark on what tariff gets slapped on us from the US, but do you sense that the case is building up for a recovery? Or don’t you think there is such a case because there hasn’t been any major upgrade domestically?
Rahul Chadha: A couple of things are weighing on the minds of investors. First and foremost, the domestic slowdown. Does this slowdown get over by Diwali third quarter or fourth quarter? Our hope is we should see signs of urban recovery coming through. Rural recovery is coming. This is where some of the rate cuts which happened in the first half of the year would be a play through the economy. There is also a question on household balance sheets. There has been unsecured lending over the last two-and-a-half, three years. How much hole would that cause in savings and the household balance sheets has to be seen. 
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But our base case still is a third or a fourth quarter urban recovery. Rural recovery is slowly happening and once that comes in the numbers, we should see the market perform. At the same time, the regional markets were a lot cheaper and there was a lot happening in those markets from value up corporate governance improvement, etc, reforms.We have seen historically whether it was 2016, or 2019 when a global recovery happens, the north Asian markets typically outperform India and India catches up in the subsequent year.What has been your reading so far on earnings? Are there any sectors where you are building hopes on the back of the earnings visibility? Now it seems it is only the defensives and maybe the domestic consumption plays that are doing well in this market.
Rahul Chadha: A couple of things impacted the earnings. One was the India-Pakistan skirmish. Second is the consumer is still in the process of rebuilding his balance sheet, repairing his house balance sheets, etc. So, we continue to like largecap banks. The pressure on NIMs was expected. It is there in the price and now as the economy recovers, these banks should benefit from recovering credit growth and recovering NII growth. So, that is one space one has liked.
Selectively, one may evaluate some capital market plays but that would be for financials. Outside that, if we look at infrastructure, in cement we have had a good set of numbers that should build up as housing demand picks up. We have continued to like real estate from a three-five years perspective. The sector is a buy on decline. Outside that, discretionary consumption is something one would look to add exposure to, the quick commerce stocks as well as the travel and tourism companies would be interesting here.