investment strategy: 4 popular global investment strategies discounting Trump as a lot of fury & fire: Ajay Bagga

A lot of these news plays are flowing around with respect to the threat related to tariff, the emerging market flows etc. What is your view on the broader market space and any pockets of opportunity that you are spotting right now because though the consensus view or the buy is in the largecap space, does any niche pocket within the broader market look interesting to you?
Ajay Bagga: Right now, no. I would say let us hold on for the broader markets right now. Overall if you see the global macro, what are the global bond markets telling you, what are the global currency markets telling you, stock markets are still complacent, they are not believing the Trump threats, the Trump strategy is to shock, then negotiate, then come to a deal which might be a one-tenth or one-twentieth of the original ask.

Also, the markets this time around are quite wary and a bit complacent. Currency markets have not reacted. If China believes that there is a 25-60% tariff coming, you would have seen the yuan moving in anticipation. The Yuan, in fact, has strengthened this week. So that currency move is not coming through the bond markets, if you see emerging market bonds, are one of the big long plays in the market.

So, the market is largely long gold, long emerging market debt, and long US equities, long Chinese technology equities, those are the four favoured plays that we are seeing globally and none of them is really reflecting Trump tariff probability. I would say right now, the markets are a bit complacent. We will know only over the next two-three months. April 1st is a pivotal moment when announcements will start coming, whether tariffs come through or not, and then April 2nd onwards you will start seeing some follow-on announcements coming in.

Right now, markets are discounting that Trump is a lot of fury and fire, but not enough action on the ground. As far as the Indian markets go, June or July is when I will get a chance to enter in, of course, markets are not so clean-cut and do not give the chance to call like this, but right now we have at least two quarters, this quarter and next quarter of a slowdown and markets will anticipate a recovery in September, the base effect also comes in.

Last September, year-on-year growth had started bottoming out, December growth we are expecting at about 5.8% for the GDP as such and going ahead we see the recovery coming in the July to September quarter and markets will move in anticipation of that but that is a clean line, never happens in the markets. I would be more cautious and not really recommend anything on the mid and smallcaps right now.What about the power space? The government sources have said that the accumulated losses of the discoms are pegged at around Rs 6.92 lakh crore as of March 31st 2024 and Rs 7.53 lakh crore is the outstanding debt. What is your take on the power space and also will the performance of discoms be a cause of concern going ahead or should one watch out for this?
Ajay Bagga: Power is a mega trend for India and you ratchet it up along with the renewables. Those two will be outperforming sectors for at least a couple of decades. But where is the weak spot? The weak spot is this discom, the distribution companies. These are largely state-owned companies which are forced to give free power in a number of states and those subsidies normally take quite a few months to flow through and most of the states are running towards bankruptcy. We saw the case of Delhi which used to be a surplus budget, it had a deficit of nearly Rs 5,000 crore on a very small city-state kind of a state budget and we are seeing that across big states as well where discoms are not getting back their costs because of free power to farmers and the new trend of offering 200 units free power even in the urban sector.

So, there is talk of the government privatising this. There could be a one-time write-off of these outstandings. The banks and finance companies which have lent to these discoms have to be made and the government will have to create either a bond structure or an IOU structure to repay these loans, no private financier or private discom will step in and assume such losses or such outstanding debts, but the big issue is the right pricing of power.

So, the growth on the supply side is very strong. Right from the power plant makers to the generation companies to the transmission companies who are setting up the transmission grids both in the public and private sector, those will do very well, the companies financing them will do well, but this weak link is these discoms which are largely state-owned, which are making losses due to the subsidies to the agriculture and the urban poor and that is unfunded on the state’s balance sheets and that is coming home to roost.

So we will have to find some solution, but it will not upend the dynamics of the power segment because the industry is paying for that, plus there is enough funding on places like solar, places like hydrogen, places like hydro, those have enough funding and those will continue to grow.

We have certain news flows on how OMCs may be paid for LPG under recovery. But if they do not get that, it could be a ugly year and that is what the brokerage note is also mentioning. What is your take on OMCs? If someone wants to play this theme, is it worth venturing into?
Ajay Bagga: Not right now. The model is spoilt because of the LPG under recovery and we are seeing more and more announcements from state governments. So, overall, the pricing power is lacking. You have better options in time than the state OMCs. That is still a no-go zone.