“I would simply say in conclusion that Donald Trump does not like a strong dollar. When he talks about the dollar, he says he would want it to go down. So, if it does keep going up, I think that he would not like that very much,” says Mark Matthews, Julius Baer.
What looks like a buy America, sell emerging market trade looks like it is reversing. In last couple of days, emerging markets and especially India, they have made a comeback. So, do you think the transition what we saw after Donald Trump got elected, that long dollar trade, is that getting over? Is that getting rusty?
Mark Matthews: Hard to say. There are so many moving parts to this incoming administration. But on a fair value purchasing power basis, the dollar is slightly overvalued. So, fundamentally, it should not go up anymore. But if this Trump administration really ignites the animal spirits of the US economy, if they remove sanctions, which they may do, which would attract more buying of treasuries, and if they introduce tariffs, all of that would conspire to the dollar going up more.I would simply say in conclusion that Donald Trump does not like a strong dollar. When he talks about the dollar, he says he would want it to go down. So, if it does keep going up, I think that he would not like that very much.
Easier said than done. For dollar to go down, the economy has to either contract or they will have to do something different which they have not done in last couple of years. So, while Donald Trump does not like strong dollar, he loves tariffs. How will the combination of both of these factors work?
Mark Matthews: Really, I do not know because he, as you know, has been talking about tariffs on all kind of countries, including a 25% tariff on Canada. But the Toronto Stock Exchange is at an all-time high. So, those two facts are incongruous. If the Americans are really going to put a 25% tariff on all of the approximately half a trillion dollars of imports that they get from Canada every year, the Toronto Stock Exchange would be going down, and actually so would the S&P. So, the market is telling you that this is not going to happen and the market is usually pretty smart.
So, where does it leave India then, like Nikunj was asking earlier, and now you have got some political turmoil going on in South Korea as well. You think out of the entire emerging market plus Asia-Pac, India continues to look attractive and more so after the recent correction which has taken place?
Mark Matthews: It does not particularly look more attractive after the recent correction because the earnings have been downgraded by around the same amount that the market has corrected. But I still think it is a good market and the reasons why it has come down a little bit, most of them will move in the rearview mirror. So, when I count those reasons, earlier you were talking about Swiggy, so there has been all these new IPOs that have taken the attention of the secondary market, that I think is still an issue. But the GDP growth, which was very soft in the most recent quarter, that I think is in the rearview mirror because it was due to the heavy rains, it was due to the government spending being delayed, and the government prioritising welfare spending instead. Now, the big Maharashtra state election is behind us, the government will start to increase capex again. And the RBI, which had told banks to sort of slow down their credit, well, that has happened and HDFC Bank has brought its credit to loan ratio down to a very reasonable 80%.
So, looking forward, we are going to see a reacceleration and GDP growth of around 6% next year. Now, where that leaves EPS growth, I am not so sure. But I guess what I am trying to say is that when I add up all the pros and cons, there are more pros than cons for India.
But given all of this, what happens to consumption because the upper end of the consumption was doing quite okay. It was the mass segment which is under pressure because rural is also recovering, but I think it is just that middle class segment of sorts which is actually under pressure. When do you anticipate a bit of a revival there and what should the stock positioning be like just ahead of that?
Mark Matthews: I am sorry, I cannot really think of anything intelligent to say about middle class spending, apart from the fact that long term I see it as a strong thing because the middle class is going to get bigger and bigger in India. And as it does, middle class will consume more. So, GDP per capita, which is about $2,600 this year should go up to about $4,000 over, let us say, by 2029, 2030. And if that is the case, I would not be too worried about whatever recent pullback there has been in middle class spending. For whatever reason that has happened, I do not know, I am sorry.
But given the fact you are talking about how India is favourably placed, what then will call for a reversal in FII flows? Maybe we have seen very initial signs of it. But the expectation is that earnings are only going to get moderated from here on. We are not expecting a big recovery in earnings and the valuation multiples cannot expand further. I mean, we are already the third most expensive market when it comes to the GDP to market cap ratio right now. What then will bring back the FII money into India?
Mark Matthews: Well, it did not leave because of anything that was going on in India, it was simply that the dollar was going up and whenever the dollar goes up, you will see foreign outflows from Asian markets including India. So, I would simply say when the dollar stops going up and just to reiterate what I said earlier, fundamentally, there is not really a case for the dollar to appreciate much more. And when we get used to this Trump 2.0 administration, which I think the market is gradually starting to get used to it and the dust settles, then the dollar should probably revert to fairer valuations, which would be below where it is now.
Now, a lot really hinges on how markets would react to the new Republican regime, which would be in place from January. From a market standpoint, how much of the adjustment of the new Republican regime, whether it is on tariff, whether it is on boosting US manufacturing, whether it is on de-globalisation, is something markets have already factored in. Like they say that you buy the rumour and sell the news. Could the same be at play in 2025 after Donald Trump takes over?
Mark Matthews: All I can say is that if you look at the markets, they are telling you the big tariffs that Trump is threatening on BRIC countries, on its neighbours to the North and South, are not going to happen. Because if they did, there would be a huge burden on the American consumer, thousands of dollars of increase in the consumer’s annual bill if all of a sudden imports from all of those countries became much more expensive. So, I guess the market is calling Trump’s bluff. Now, if it is wrong and Trump really does those things, then of course the market is going to go down a lot.
But at least for now, it is looking at this incoming administration in a very different light than it did back in 2017 when we had a tremendous amount of volatility in the first Trump administration. Maybe one reason is that there are some very good people in this incoming administration, not the least of which is the presumptive Treasury Secretary Scott Bessent, who is not a fan of tariffs, would like the dollar to remain a reserve currency, but does not like a strong dollar. And I think he and some of the other key advisors to Trump like Vivek Ramaswamy, like Elon Musk will bring economic rationality to their policies and that is why the market is not tanking on these bombastic statements that Trump is making on the social media.
Why do we have this synchronised move in gold and Bitcoin and the dollar? Bitcoin is a play that the world fears that US balance sheet is shaky, that is the time Bitcoin started going higher. Gold is a play because nobody wants to go to financial assets, that is gold. But the fact that dollar is also going higher means that there is belief coming back in dollar. So, dollar, gold, Bitcoin normally and logically should not move in tandem with each other or until and unless I am getting it wrong.
Mark Matthews: Well, I suppose that correlations and inverse correlations do not remain forever and the world economy is changing, what we used to call the developing world or the emerging world is much bigger and much richer than it was before. So, you have seen people in that part of the world continuing to buy gold, even if they are not fans of the dollar and the dollar, I guess, is being bought by other people.
So, there is more money spread around the world than there was before and so people who have appetites that differ from what we have traditionally seen can set new trends and asset prices. As for the cryptocurrencies, clearly, it is because of the Trump administration’s declaration that it will be embracing the crypto, Bitcoin in particular, so that would be very sentiment driven, that one in particular.
