Indian markets are at record highs. What is driving this rally? Is there more steam to this rally, or will the party be over soon?

I remain a massive bull on Indian small caps, and have been so for the past three years.

The bull market in small caps has just actually started as it only recently took out its 2007-08 highs. Hence, technically speaking, the new bull market for small caps has started only now.

Given this massive move that I see, valuations, etc., are all meaningless terms. Indian bond yields are at multi-year lows, so why look at P/Es (price-to-earnings) without adjusting for far lower bond yields?

If you adjust for yields that are 20% lower than what we have seen in years, one can argue that valuation metrics should be at least 20% higher.

In reality, the effect on valuations is vastly higher, when you look at it mathematically.

Hence, I don’t at agree that India is expensive at least in small caps, given better balance sheets, lower cost of capital and reasonable growth outlook.

Are Indian markets expensive at this point? Why or why not?

The answer is above.

When and by how much do you see an earnings recovery happening for Indian companies?

I don’t see a marked recovery in large-cap earnings. There will be in metal companies, but wide growth is simply not happening.

Where does India stand in your EM/Asia preference? Why?

Indian small caps are the best equity class in the world. I have maintained this for years now and am even more bullish now

Will Donald Trump’s tax cut plans impact emerging markets in a big way? How much impact do you see on Indian information technology and pharmaceutical sectors from US visa restrictions and protectionist policies?

These two sectors are in strife. Old models are fading. New models are too nascent. That said, I am a big believer in the management quality of many Indian IT and pharma companies and am sure they will think their way out of the problems.

Are geopolitical risks being ignored by global investors?

There are risks but I don’t think they are fatal.

What are the key risks to this rally in emerging markets, particularly India?

As of right now, I see no major risk. Risks will build up. The EM bull market started in February 2016. Risks will build when we have run for a few more quarters.

Which sectors in India are you overweight and underweight on, and why?

We have been very bullish on metals, steel, etc. And, of course, on small caps chemicals, infrastructure, etc.

Ami Shah