Ajay Bagga on Trump's influence and sectoral performance in Indian markets

“There will be outflows from China and inflows into Japan. There will also be some tax cuts, the debt will increase, and immigration will be tightened, making the labor supply even tighter. This is why US yields went up after the Biden-Powell debate. It appears that Trump is likely to win, which would mean higher borrowing costs, lower taxes, and increased debt levels. The Trump trade will be very exciting for the markets, and we will need to position accordingly,” says Ajay Bagga, Chairman of Elyments Platforms. Edited excerpts:

ET Now:

Today, it is going to be a crucial day in terms of macro data because the US jobs report is expected tonight. The FOMC meeting showed that policymakers are not in favor of a rate cut, but they did signal that the US economy is on a disinflationary path. What kind of macro cues are you gathering at this moment that can be aligned with Indian markets as well?

Ajay Bagga:

Overall, if you look at both the leading and the coincidental indicators of the US economy, there is a slowdown coming in. The labor market has become softer. Job creation is slowing down to some extent, and wage growth is also decelerating. Both the ISM numbers, manufacturing as well as services, came in the contraction zone. So, overall, it is a soft-landing economy, which is what the Fed wanted.

Powell's latest statement at the ECB seminar was that we can afford to wait. We understand the issue with a restrictive policy, but given the strength of the US economy, we can afford to wait. Now, the market is factoring in one rate cut in September, with about a 70-75% probability, and another rate cut in December. However, the Fed speakers and voting members are very clear that we need to see a lot of data for multiple months before going down that route. So, let’s see who is right, whether it is the market or the Fed. But right now, there is an expectation of one rate cut by September.

The second thing is that Trump is mostly expected to win the elections regardless of who the Democrats put up against him. The momentum seems to have shifted to Trump. The "Trump trade" has started in the world. Japanese equities tend to do very well; in 2016, within the first few months, the Japanese index was up 30%. When Trump's anti-China tariffs come in, the Chinese market reacts.

There will be outflows from China and inflows into Japan. There will also be some tax cuts, the debt will increase, and immigration will be tightened, making the labor supply even tighter. This is why US yields went up after the Biden-Powell debate. It appears that Trump is likely to win, which would mean higher borrowing costs, lower taxes, and increased debt levels. The Trump trade will be very exciting for the markets, and we will need to position accordingly.

ET Now:

Also, give us a sense of the run-up to the budget. We have seen budget-specific sectors like infrastructure and defense move quite a bit. Jefferies recently noted that the government will likely balance between fiscal policies and capex due to a sizable dividend and tax buoyancy. What do you make of this space right now? Will these sectors continue to perform well? What should be the expectation in the run-up to the budget from here?

Ajay Bagga:

The only issue here, as we discussed earlier with railways and defense stocks, is the valuation. I have been spectacularly wrong on this because they have continued to rise even after reaching 50 to 80 times price to earnings. The sheer momentum of money coming in, such as block deals of 400-800 crores yesterday in some defense stocks, has driven this growth. There are people allocating money at 58 to 87 times price to earnings, which doesn't make fundamental sense. It’s more about the promise of future performance being baked into these stocks. I think we will see a continued melt-up in these stocks leading into the budget, with some potential softening post-budget. These are very good companies, well-run, with huge order books and excellent execution over multiple years. The only issue is valuation. From a valuation perspective, we have reduced our exposure to defense and railways, even though they are growth stocks. We are currently looking elsewhere, with power being a good option. Utilities and financials offer a more compelling investment thesis. Defense and railways are central to the India story, with a lot of import substitution and export growth expected. We have factored a lot of this in already. If valuations were better, it would be a no-brainer. The high valuations make me cautious about railways and defense.

ET Now:

I also want to get your views on the way sectors have performed over the course of the week. IT and pharma have been the biggest gainers, while FMCG and others have also done well but not as much as IT and pharma. Do you think defensives are coming back into play, and will cyclicals take a back seat?

Ajay Bagga:

At all-time high markets, when companies perform as expected, you don’t see significant price spikes. However, if there is even a slight disappointment, you will see sharp declines, as we saw with a leading private sector bank today. With no growth in the quarter, there was a sharp selloff of 4%. Fund managers have allocated money out of financials into IT and pharma on a defensive basis. IT seems to have bottomed out. Management commentaries from major IT companies indicate readiness with AI playbooks and extensive training on generative AI. Indian IT will help convert enablers to provide cost and productivity advantages to end-users. Over the next six months to a year, we will see case studies coming through, making it a good time to invest in IT. Pharma has performed well over the last year and is expected to continue doing so. However, not managing US FDA audits well and repeated observations are significant issues. If companies could invest in compliance, we could see a re-rating. IT and pharma are clearly defensive, with IT bottoming out and looking like a good time to invest, expecting outperformance over the next one to two years.


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