Jain said, “We need bond yields to not go much higher and also, at the same point of time, expect that equity and bond differential stays very high, and we do not see earnings cut. I think that’s a lot of things which are uncertain, and that’s why I would say that not gunning for big returns. I don’t think we are going to end with a very high number versus where we started this year.”
Jain, explained that if near-term growth concerns lead to a normalisation of valuations at a 6.75% yield—assuming yields remain unchanged, which would require a decline in US yields—then the Nifty’s fair value by year-end could align around 23,000.
CLSA is underweight on IT, discretionary, industrials and healthcare and overweight on commodities and insurance.
Below are the excerpts of his interview with CNBC-TV18.
Q: As we have entered this year, there are too many moving parts, from the US economy to yields, to dollar, to a slowdown in earnings. How optimistic are you about the second half earnings revival?
A: I think there has always been many moving parts when you start the year, and that is why what we do at the start of the year is we come out with a typical report, which is a very well-read report by our clients. It is called themes for the year and this time, we have 25 themes for 2025 and we discussed a lot of what you mentioned.
Firstly, we at CLSA, we are about 2% to 4% below consensus as we start the year. More importantly, when I look at just our numbers and certain key drivers that moves the earnings, moves the big stocks that determine the overall Nifty earnings there is an assumption of normalisation happening rather quickly in terms of growth in 2025-26 (FY26). For example, things like credit growth, we are right now sub 11% credit growth, broadly looking at the numbers that our team has picked in, somewhere closer to 12 to 13% is being assumed for 2025-26.
Similarly, for commodity prices and profitability, we are assuming that things will improve. So, there is a recovery that is baked into our numbers. There are numbers are a little below consensus, so that maybe consensus baking in a little bit more of the recovery. Now that is just normalisation of growth.
Now, the process of normalisation, if it is a little slower, after the weak GDP number that we saw in the second quarter, then there is obviously risk to earnings in 2025-26. You remember the last quarter, we saw pretty big downgrades in earnings. So, further downgrades can be a bit problematic in terms of expectations of Nifty returns.
Q: You are at 12 to 13% for 2024-25 (FY25), is that right?
A: We are at 12 to 13% of credit growth. The earnings number that consensus is baking in for 2025-26, Nifty earnings growth is about 16%. We would be a slightly lower than that.
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Q: Give us a directional view, what is your best sense? Lots of things in the mix, but you got to take a stand?
A: India’s expensive valuations is what is being talked about by everybody. What we brought out this time, looking at the start of this year is, I am actually quite worried about the fact that Indian bonds, as compared to where the parity should be, versus say, US bonds are looking more expensive, and Indian currency is looking more expensive. And both of that is what sets up, and particularly in the next four or five weeks, where macro is going to be very important and big, that could be a little bit of a problem.
Let me explain that. So last year, we did not have any cuts from RBI but Indian bond yields fell by 50 basis points. In the US, Fed had several cuts, but US bond yields settled up by 80 basis points. So Indian bond yields effectively outperformed by 130 basis points during 2024. Currently the differential between US and Indian bond yields, 10-year bond yields is down to just close to 2% or a little over two percentage points or so. Now, to a naked eye, of course, that’s one of the lowest we have seen in the last 18 years. But I am less bothered about it, because what I show in my report that this is something which tracks very closely with what is the forward market, currency depreciation expectation, and that is more like 2.7%, 2.8% or so. So everything kept together, there is a chance there if US yields do not do anything, then Indian yields need to go up by almost 50 basis points for us to get to that parity.
Now, if we imagine that happening, and even if we assume that the bond and equity valuation differential remains at the bullish end, that is the max differential, or earnings yield versus bond yield, and we go from 6.75% to 7.25% bond yield, then we are struggling to get anything more than 2-3% return on the market. I would say it’s going to be tough to and that too, in the bull case, if we there is a 50-basis point move in bond yields. We need bond yields to not go much higher and also, at the same point of time, expect that equity and bond differential stays very high, and we do not see earnings cut. I think that’s a lot of things which are uncertain, and that’s why I would say that not gunning for big returns, single digit returns will be – if we scrape through with that, we will be very happy with that. There is going to be a period where things will go much cheaper, and then we can come back to hope for an up move. But net-net, don’t think we are going to end with a very high number versus where we started this year.
Q: What do you think in terms of a downside from the Indian markets? We are 10% off the peak, how much more downside?
A: Let us not even take worst case, if you were to say that because of concerns of near-term growth, our valuations kind of normalise. At 6.75% yield and assume that yields do not rise, which is going to be difficult, because that will mean US yields have to fall then even at that, just getting back to normalised differential versus bonds we are looking at end of the year, Nifty fair value at that scenario at 23,000. So even under that scenario, there could be downside for the market. So not really gunning, we have had a great run. This could be that year of consolidation, following which started in October. That might very well continue. I would say, if it’s a very orderly kind of a correction, and we scrap through with earnings catching up and valuations becoming more palatable, that’s the best scenario one can imagine for the market.
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Q: CLSA is underweight on IT, discretionary, industrials and even healthcare. They are overweight on commodities and insurance. Just leave us with some broad setup in terms of hiding places. On commodities is it just oil and gas or in general are you expecting metals to also move up. Just leave us with the explanation behind that construct?
A: You missed one sector, our biggest overweight is actually staples. We run our India focused portfolio, and for the last four years, I have tended to completely avoid staples. This time, at the start of the year, we have actually made staples our biggest overweight, cut our overweight on banks to just above neutral and commodities, we have metals as well, and oil and gas names as well.
Staples, I believe that that’s really the big sector call which we have taken very anti-consensus. The kind of underspend that we have seen on government capex, both at the state level and the central level, I think that is also maybe hinting us on government’s changing priorities. If that happens, the investment and the capex linked stocks are already over excited and at elevated valuations. But if priorities change to more welfare, affordable consumption side of things, then that’s the sector which is pretty beaten down because have not done much for a lot of time. That’s why we believe that the realities of coalition government and the hints that we have got from recent state elections, plus the good rainfall that we have seen and the good sowing that we have seen, maybe just bring back that affordable consumption to kind of life and within staples, we like the food related companies more.
For full interview, watch accompanying video
