Never late to the party with growth's long runway: Gautam Chhaochharia

The merger between UBS and Credit Suisse (CS) has emboldened Swiss banking plans in India. GAUTAM CHHAOCHHARIA, managing director and head of global markets in India at UBS, says this is an opportune time given the long runway for growth. In an interview with Samie Modak and Sundar Sethuraman in Mumbai, Chhaochharia discusses factors impacting the markets and the economy. Edited excerpts:

Markets globally have had a good run this year. Are there any global headwinds that could spoil the party?

While markets have had a good run, uncertainty has remained elevated and may persist. Geopolitical tensions have contributed to this uncertainty in recent years. However, despite these geopolitical pressures, we haven’t seen a collapse in global growth or severe and sustained market disruptions in the recent past.

There have been potential bank runs in the US, China’s slowdown, and concerns surrounding its property cycle. Therefore, when considering the broader picture, including the Indian context, the risk lies in a black swan event or a big slowdown in global growth.

How come markets have remained resilient to global geopolitical turmoil?

There are two main reasons for this resilience. Historically, geopolitical turmoil has spread primarily through oil prices and the financial system. The current impact of oil price shocks on the US economy is much lower than it was 20 years ago.

In terms of the financial system, the influence of countries like Russia and Ukraine is quite limited. However, a geopolitical event in a country with a higher weight or stronger linkage to the global financial system could potentially have a more profound impact.

Talking about the Indian market, is there anything specific to watch in the Budget?

One aspect is policy continuity, particularly fiscal discipline and maintaining focus on capital expenditure (capex) spending. Following the election results, there’s considerable debate among investors about potential shifts towards more socialist policies by the government.

The critical factor to monitor is not just the increase in spending on social schemes, but the magnitude of this increase. The approach to social spending is crucial, as it can be leveraged productively to foster economic growth and asset creation.

How are global funds positioned when it comes to India at this juncture?

In the emerging market basket, India’s relative overweight position is one of the lowest. However, foreign funds are still overweight, signalling a positive outlook on its long-term potential.

One reason for this relatively lower overweight position historically is expensive valuations. On the other hand, China has become comparatively cheaper, fostering hopes of recovery.

The dilemma for global funds is whether to increase India’s weight now or await potential valuation corrections, particularly given the availability of more promising outperformance opportunities in other markets over the next six to 12 months.

Investors are keen to observe how India’s earnings growth unfolds. Valuation multiples suggest that earnings growth could exceed current market forecasts. Despite this, India’s earnings growth remains comparable to other markets in the near term, including China, where valuations are more favourable.

What are the other sectors or themes that you are bullish on?

We favour the business-to-business space over business-to-customer sectors, including utilities and select areas of industrials. While valuations may not appear attractive, the growth delta matters. We are focused on sectors expected to sustain growth levels higher than Street estimates. Value is always absolute and relative.

On an absolute basis, few pockets are offering a sufficient margin of safety and scope for supernormal returns. However, relative to other sectors, opportunities are always there.

In many instances, headline valuation multiples are quite high. This suggests that the markets are pricing in a much stronger capex cycle.

If stocks are trading at around 30–50 times price-to-earnings or even higher, the market is pricing in much higher earnings growth, not just 15-20 per cent, and over a longer period. This scenario can occur during a robust capex cycle.

After Hyundai, will more multinationals consider listing in India?

When valuations are rich and attractive, it implies access to cheaper capital. All businesses love cheap capital. However, the decision also hinges on specific circumstances because raising capital, even if it’s cost-effective, ultimately entails dilution. Hence, it’s crucial to weigh whether such a move might compromise future growth opportunities.

Another big trend is the expansion of private markets. As the scale of the Indian market expands, it will continue to attract larger private equity players with large pools of capital reserves, including sovereign funds. This trend has been evident over the past two to five years and is likely to continue in the foreseeable future.

What are UBS’ plans for India? Is there sufficient capital available to pursue growth here?

We must meet capital adequacy requirements as per our targets. However, there is ample room for us to grow and invest.

In India, capital should not hinder our ability to grow businesses where profitable opportunities align with our hurdle rates and growth objectives. So, we are retaining the onshore wealth business acquired from CS.

UBS had not maintained an investment banking presence in India (known as Global Banking in UBS) for some time, a gap now filled through our acquisition from CS.

In terms of equity and research, we already have a comprehensive presence. We aim to establish ourselves as a Tier-I equity business.

Are you late to the party?

You are never late to the party if there is a long runway for growth. It’s also easier to invest constructively when markets have achieved scale, allowing for quicker realisation of results, rather than waiting for the market to expand further.

Currently, the Indian market has enough scale. India has always been a higher-growth market than most economies, and now this growth is off to a much bigger base and scale. The question under debate is whether India will grow at 6-7 per cent or potentially reach 8 per cent.