India our APAC priority and primary market focus: Bhaskar Laxminarayan

He says that a 25-bp cut with a strong dovish message could be as effective as a 50-bp cut with minimal commentary

With markets looking forward to a rate cut by the US Federal Reserve (Fed) this week, Bhaskar Laxminarayan, chief investment officer and head investment management Asia at Julius Baer, shares with Puneet Wadhwa that a 25-basis-point (bp) cut paired with a strong dovish message could be just as effective as a 50-bp cut with minimal commentary. The impact, he observes, will largely depend on the accompanying message and how it is interpreted. Edited excerpts:

Where does India rank on your priority list within the Asia-Pacific (APAC) region? What are your views on Japan and China?
 

India is our priority in the APAC region, particularly from an equity perspective. It’s the primary market we focus on. China is often easier for business operations but more challenging for equity returns.

Japan, on the other hand, is an intriguing market with both positive and negative aspects. It remains at the forefront of technology and business scalability, and recent regulatory changes are encouraging companies to streamline their balance sheets. This, combined with Japan’s currently undervalued market, offers the potential for significant upside. Therefore, Japan is also a preferred market for us, alongside India, in the APAC region.

Aren’t valuations a concern regarding Indian equity markets?
 

Due to regulatory constraints, Indian equity investors have traditionally been more domestically focused. This contrasts with other markets like Malaysia, Singapore, Hong Kong, and Thailand, where investors have long had the freedom to move capital internationally, leading to greater portfolio diversification.

Indian equities are often seen as more expensive compared to US equities, presenting a barrier for external investors. While the growth potential in India is recognised, the cost of entry remains a major concern.

Where do you see opportunities in the Indian equity markets?
 

I find largecap valuations to be reasonably comfortable. My concerns mainly lie with microcaps, smallcaps, and some midcaps. If one is looking to invest for the next few quarters, largecaps seem to be a safer bet.

The structural story in India remains strong and intact, barring any dramatic or unforeseen events. The key question moving forward is whether the market will remain predominantly domestic or if foreign investors will return, which will depend on future valuation trends.

What’s your expectation from the Fed?
 

If they don’t cut rates in September, the markets might not react negatively right away, but a cut seems almost inevitable. Whether the cut is 25 bps or 50 bps might not make a huge difference.

A 25-bp cut with a strong dovish message could be as effective as a 50-bp cut with minimal commentary. The impact largely depends on the accompanying messaging and how it’s interpreted. Overall, the immediate response to a rate cut should be favourable.

So, a rate cut will lift all boats then?
 

Currently, the US market is driven by large technology companies, and they will certainly benefit from this rate-cut cycle. However, rate-sensitive sectors, which are trading at reasonable discounts to market price-to-earnings (P/E) ratios and valuations, stand to gain even more. This could lead to a rotation where cyclical factors help lift these undervalued sectors, potentially creating a broader market rally. In this scenario, both growth and value elements are well-positioned. As a result, the market breadth could widen, which is a positive development.

Comparing US value stocks to those in India, you’ll find that US value stocks often present more attractive valuations.

In India, where valuation metrics might be stretched, international investors may opt for cheaper alternatives with similar growth prospects. This could be a strategic choice to take advantage of better valuations until the right opportunities arise.

Are Indian markets concerned that earnings may not catch up to stock prices?
 

Current P/E ratios might indeed seem high, but this often reflects a premium paid in anticipation of future normalisation. Historically, India has shown that such premiums can be sustained over the long term.

In India, a premium is often paid forward for structural growth stories. This is evident in sectors like consumption and certain public sector undertakings, where the premium reflects expected long-term growth rather than immediate earnings catch-up.

The idea is that while these premiums may not lead to rapid earnings growth, they ensure sustainable growth over a longer horizon, like 10 years rather than just a few. Over time, valuations may adjust to reflect more regular growth patterns, as seen with early private banks and technology companies.

What should an ideal portfolio construct be for Indian investors?
 

You need to focus on India’s consumption and infrastructure stories. In this context, consider the banking, financial services and insurance sector as well. We’re actively reviewing the market and are increasingly comfortable with largecap investments, as they have consistently delivered strong performance.

Can you shed light on your India equity fund?
 

Julius Baer’s India equity fund has surpassed $370 million in assets. This long-only fund targets the Indian equity market with a ‘quality growth’ strategy for offshore investors.

It focuses on companies undergoing tactical transformations due to company-specific events, including corporate restructuring and mergers.