In the volatile global macro-environment of the last couple of years, how has India fared compared to other emerging markets and Asia?
India is the shining star of Asia right now. It’s the fifth-largest economy, headed to be the third-largest economy, with extraordinary fundamentals and technicals supporting excitement about it. What has been great for me is the enthusiasm of Indian business leaders who I’ve had the opportunity to meet here on this visit; their excitement and enthusiasm about everything they want to do in India and the alignment of things that look great and exciting for them. Now importantly, the rest of the world, particularly in the ‘China plus one’ opportunity set where people are looking for resilience in supply chains and highly attractive skilled labourers who can do services, technology, and manufacturing, they are very excited about India. And so, from Citi’s perspective, we think it’s, if not the best, one of the best opportunities for India clients and our international clients to capture. And our commitment is to make sure Citi’s helping them do it. Our long-term perspective is that this is a place that’s going to be constructive for growth.
Is the environment conducive for the M&A market amid tighter liquidity conditions everywhere?
The M&A market has been pretty good in India, all things being equal — a $85 billion type of opportunity. ECM (equity capital markets) in India is probably one of the places with the best green shoots for activity. As you know, DCM (debt capital markets) activity has been a little bit of a different story, part of that’s been rates.
I think what we must do is take a slightly longer-term perspective. We don’t think the M&A opportunity goes away. Frankly, we see upside to that in the Indian market.
I think when we look at ECM, again, we don’t see a slowdown in opportunity. In fact, we’ve seen more Indian companies feeling more confident about the liquidity profile and the ability to access the Indian equity market as a solution for opportunities. We think there’s an opportunity to help local ECM markets grow. We also think there will be companies who choose to use the international IPO markets, particularly in New York. And we were excited about that, because given our globality, we can help.
On the debt side, I’d say we’re cautiously optimistic of improving conditions, both by rate stability locally, cost of money and adjustment of people looking at that.Emerging markets were big beneficiaries of the global liquidity glut after Covid. It’s quite clear now that US dollar funding costs are going to be elevated. What does that mean for deal making?
The reality of interest rates being higher for longer is rolling its way through the outlook for economies around the world. I think stability of the cost of capital is as important as the absolute rate. The biggest challenge that we had in this very difficult period over the last two years was the massive adjustment and differentiation in views of the outlook for interest rates. And that volatility was as much a problem as the absolute rate. Now, we certainly live in a world where the cost of money is higher, and that will mean economies will grow more slowly and deal activity will have to reflect that.
But I think as the market recalibrates to a view of valuations — we had sellers who wanted to sell up because they thought interest rates were going to be low. We had buyers who thought interest rates could be higher. We’re getting into a bit of an equilibrium dynamic, that’s helpful. Second, with respect to growth in a world where interest rates are higher, the premium that you put on quality of earnings, quality of cash flow, quality of growth, globally is important.
If you looked at major market dislocations since 2000, the average time that market activity decelerates quarter over quarter, goes to about seven quarters, the longest it has ever been is 10 quarters. We happen to be in the seventh quarter with respect to this adjustment.
What’s more likely to happen in our view, with the cost of money not being outrageous — we would expect to see a cycling up of confidence in the marketplace and that translating into more M&A activity, more ECM activity, and more DCM activity than we’re seeing right now.
What’s the outlook for the tech industry? Is the funding situation improving or is the so-called winter likely to continue?
There’s a short-term perspective and an intermediate, long-term perspective. We’re long-term bullish on technology because it’s so fundamental. Our long-term perspective on technology is that it’s exciting and interesting; it’s a place where growth will naturally come.
The biggest challenge with technology and the technology winter we’re dealing with is a world where interest rates were zero, and therefore, enormous target market opportunities to be captured by new technology companies, or existing technology companies was extraordinarily exciting. If you did a private placement round at a high valuation, you don’t want to do an M&A sale or an IPO at a lower valuation. But over time, if you run out of money, or you need to position your franchise for growth, you will ultimately do the right thing to make your company succeed. And that’s what we think will be happening.
I think we are cautiously optimistic about activity levels for technology companies in M&A, ECM, and DCM to pick up in 2024 and mimic the overall market where we think activity levels will get better. And that’s true in India and it’s true in the global market.
Given the degree and the pace of monetary tightening in the US and in other advanced economies, is there a global fault line when it comes to refinancing debt?
Fault line may be an exaggerated sense of it. There is a financing wall that many people see in the global marketplace in the sort of 2025 and 2026 era; there’s a lot of debt that needs to be refinanced. And that will go from very low-cost debt to more expensive debt. But it’s important to realise that this is more expensive debt, not super expensive debt. If you look over our lifetime, there were plenty of periods where debt was more expensive than it is today. When you look at the economic conditions, I think we see an opportunity to adjust to that reality.