What is your view on the India-UK FTA that we have seen? What kind of an impact could that have on both of those economies and how would it position India on the global map?
Mark Matthews: I do not know what the impact will be for the UK economy, but it is not big for India as you know UK trade is an extremely small part of India’s overall economy. But what I would say is that it should be a boost for sentiment because they have been doing these talks for about three months and hopefully will put pressure on the government to do the trade deal with the United States before the August 6th deadline. That would be a much needed boost for the stock market if that comes through.
The India-UK deal is through, but the other deal that the markets are waiting for is the India-US deal. The markets of late have been showing resilience despite volatility in earnings? The other trigger will be the trade deal talks. Which number can be taken very well for the markets and which number can be disappointing for the investors?
Mark Matthews: Broadly I would expect it to come in somewhere between 15% and 20% with 20% being the ceiling for the Southeast Asian countries like the Philippines and Indonesia. They are at 19% and then 15% was the recent trade deal with Japan. So, that is the range I am looking for. If it was above 20%, then I would be disappointed, I do not know about the market. Unlike Japan or the Philippines, trade with the US is not material for the Indian economy. I find this is frankly more noise than substance.
I am just going through your latest fact sheet. Amongst the preferred sectors with banks and consumption, I am also seeing IT popping up. What is driving your conviction on IT given the kind of earnings we have seen, and the trade deal overhang that is still with us because it is largely an outward facing sector for Indian companies? What do you like within the IT pack?
Mark Matthews: I like two things. First, I like the fact that the sector is down almost 20% so far this year. It is not across the sector but there are pockets of very deep value. This is a place in India where you can find deep value. And the second thing is that the guidance from management in the most recent quarterly results was largely positive, looking for better times ahead. So, those are the two reasons why we like it.
The other preferred sector is the consumption space. The discretionary plays back home have been doing very well, the staples have underperformed. Anything fresh that you have added within the consumption basket? Also, what is your overall take on the valuations with respect to discretionary versus staples right now?
Mark Matthews: I am sorry I do not have a view on that, but I can tell you what we think about the consumer space. It will be a beneficiary of the Rs 1 lakh crore tax breaks that were announced in the Budget back in February and we should start to see that filter through, but also the one percentage point cut in the RBI’s rate since the last five months – these two forces should be beneficial for the entire space, especially for bigger ticket items like autos and property.
But when we interacted last time, you said that gold seems overbought and the kind of rally we have seen in gold was too much too soon and now we are seeing that playing out and that gold is softening. Now that there is some more clarity in terms of the trade deals and equities are doing well globally, what is your take on gold? Where can gold head as a commodity?
Mark Matthews: I think I was wrong and I remember that conversation. It is probably higher than when we last spoke. I felt that it was overbought because at that time it was up about 25% from the beginning of the year. Now, it is up about 28%. I think what I told you at the time is I preferred the idea of buying stocks in Hong Kong relative to gold. So, I suspect on that basis, it might have been the right call. Hong Kong stocks have done better than gold since we last met. But yes, if you look back over the last 100 years, gold’s return is on average 5% a year in US dollars. So it has been a very fine investment, but it does move in spurts and we have just had one of those big spurts over the last two years.
So, I would have thought it was due for a break, and it continues to go up. Long-term, the thing that speaks in favour of gold is that most central banks do not have enough of it and they would like to diversify away from a very heavy concentration in dollars. In fact, there was a survey that came out last month that showed off all the assets that the major central banks of the world said they intended to increase their allocation to over the next 5 to 10 years, gold had the largest vote in favour.
So, there will be a steady buyer of gold from central banks, but they do not tend to chase the price. They tend to be very calm and steady in their buying of it. I do not want to ramble, but what I am trying to say is I still feel that it is overbought in the short term, but longer term it should continue to demonstrate that attribute of going up about 5% per year over the long term.