‘Fixed income and Indian start-ups hold potential for superior returns too’

As inflation volatility eases and fiscal deficit consolidation looms, India’s interest rates could decline, creating opportunities in fixed income, he said. “Further, India has a vibrant start-up ecosystem and is home to the third largest number of unicorns, or young technology companies valued at over $1 billion,” he added.

Meanwhile, apart from Indian equities, Dover sees attractive opportunities stretching from the US to Europe, Asia, and Japan.

Edited excerpts:

With Indian equities seen as highly valued, do Indian stocks still excite you? If so, which sectors catch your attention, and which ones would you steer clear of?

In my opinion, Indian equities are relatively fully valued, compared to other markets, for three main reasons: Corporate earnings growth has been strong, and consensus forecasts are still optimistic; the Indian market is unusual, in that free floats are generally lower than in other markets; there is a surge in interest among foreign investors attracted by the promise of growth, and domestic retail investors entering the market for the first time.

The long-term prospects for India are exciting, provided that policymaking is astute and effective, and inflation remains under control. Our colleagues in the India investment team are very positive on the positive impact of rising affluence on the premiumization of the India consumer, and are avoiding the materials sector, particularly metals and mining, because of the weakness in the Chinese real estate sector.

The US Federal Reserve’s jumbo-sized rate cut of 50 basis points (bps) kicked off the turnaround in rate cycle. Does this make Indian equities or fixed income more attractive, and what is your reasoning behind it?

Why the 50bps rate cut? After a turbulent few years, we find that the US has low inflation, low unemployment and solid economic growth. Pre-covid, the country had exceptionally low inflation, zero interest rates and no protection from deflation. That was abnormal and the next few years could present a more stable trajectory, because normal is good in capital markets.

For international investors, there is no rule of physics that dictates asset allocation to a country’s capital markets as a function of the interest rate cycle in another. But in a ‘normalized’ world, the US economy still looks strong, the Chinese economy not so much. For India to fulfill its exciting potential, it needs to grow fast but maintain control of inflation. This is why, besides relatively attractive yields, it is the Reserve Bank of India’s (RBI) control of inflation that will essentially set investors’ expectations for the country’s fixed income market.

For India to fulfill its exciting potential, it needs to grow fast but maintain control of inflation.

In my view, it’s all about India, rather than the Fed; the equity market will continue to be attractive as long as earnings continue to justify the valuations, so the fixed income market could arguably be one of the markets around the world that appears relatively more attractive, provided confidence in inflation and deficit control remains high.

Apart from equities, which asset class do you believe has the potential to deliver superior returns in India?

With inflation volatility reducing and the prospect of the consolidation of fiscal deficit, there is potential for India’s interest rates to reduce. This points to an opportunity in fixed income. Further, India has a vibrant start-up ecosystem and is home to the third largest number of unicorns, or young technology companies valued at over $1 billion. The growth of the Private Equity/Venture Capital (PE/VC) ecosystem in India has been supported by success stories of exits in India’s listed market. India is also in the early stages of a pick-up in the private capex cycle, which will need financing, albeit underpinned by strong corporate balance sheets and government support.

What are your expectations from RBI in the upcoming October policy meeting?

The RBI is expected to continue its current stance, likely maintaining rates to balance growth and inflation. While inflation has been in the 2-6% targeted band, RBI has been communicating its focus on bringing inflation decisively below 4%. While US rates have been cut by 50 bps, it is worth remembering that the RBI did not follow the Fed for the last three interest rate hikes in the US from March-May 2023.

Beyond Indian equities, which country’s stocks catch your interest and why?

The outlook for global growth in 2025-26 is relatively modest, but there are many interesting opportunities around the world, from technology and innovation to specialist civil engineering, to communications and high specification manufacturing. Geographically, there are attractive opportunities from the US, to Europe, to Asia and Japan. Each country or region has a specific set of drivers, but, in general, it is a combination of market opportunity, thematic growth (such as the recalibration of supply chains) and improved governance.

The long-term prospects for India are exciting, provided that policymaking is astute and effective, and inflation remains under control.

What’s your outlook on the Indian start-up ecosystem? Do you think this is the ideal time to invest in private equity or venture capital, and if so, why?

Frankly, I do not know if there is an ‘ideal time’ to invest in PE or VC. For most investors, the conditions look most attractive when you have a coincidence of easy and inexpensive access to financing, when the exit route (usually via initial public offerings or IPOs) is wide open, when tax incentives are present and when there is a dynamic ecosystem for start-ups. At present, India is home to the third largest number of unicorns globally and that is promising. More recently, there has been an increased focus from investors on profitability, which should help to improve the aggregate quality of this group of companies. The successful stock market listings of several large Indian startups should boost confidence among early investors.