As a global fund manager, do you share the kind of strong optimism on India that domestic investors have?
Over the long term, the optimism is very much intact. But in the near-term valuations are a little extended. It’s about how much of a premium you are willing to pay for the visibility, secular growth and the lack of correlation with the world. The foreign interest in India is as high as I’ve ever seen especially with China’s popularity taking a hit. So, it could stay relatively expensive for a while, but history has shown us that you must wait for a breather in India. And that might be a better opportunity to re-engage.
Despite the long-term optimism, why are many foreign investors hesitating to bring in the big long-term money?
They are nervous for all the other global macro reasons. They’re nervous because India has had a run. They are nervous because they have missed some of it or even all of it. They are also nervous because India is India, and because just getting into a position to engage in India such as account opening, administration and working through the system makes them nervous. But then every time they speak to Indian stockbrokers, they get excited again.
There were discussions about the need for Emerging Markets funds ex- China to improve India’s standing. Is that happening?
Before Covid, people were asking for EM ex-China, but for different reasons because they were so bullish on China. China was so big, so important, so much growth, getting more complex. It needed more attention and resources. Fast forward to 2023-24, they are looking at EM ex-China for another set of reasons. All of a sudden, China is looking bad, un-investable, geopolitical concerns, the lack of visibility etc. So, the narrative is that we have to deemphasize China, but we don’t want to miss the opportunities in the rest of the emerging world. So, they are saying let’s look at EM ex-China constructively. Now, the fact is institutional investors and asset allocators don’t do things sharply. So, they are saying let’s have standalone themes like India, Brazil and Latin America rather than EM ex-China because it’s difficult to disaggregate those allocations. The truth is when you look at a basket excluding China, it becomes a very skewed market because China is such a big part of it. For example, specific companies like Taiwan’s TSMC and Samsung become very large portions of that index. So, there are all sorts of complications that arise from it.
How uninvestable is China?
There are a number of investors around the world who believe it is uninvestable. That’s the reality. But, uninvestable is a big statement and exaggeration. I think it’s out of favour certainly for some time until policy gets better, growth improves and confidence recovers.What are the conversations you hear around India’s upcoming state and national elections?
It’s a little too soon to say but things can move very quickly closer to the time. As things stand, we don’t expect the national elections to yield a surprise result. For two reasons. One, there is a feel-good factor in there. And secondly, in terms of the alternative choices, they are not strong and credible. That hasn’t changed. And as we get closer, the incumbents will do what they can to demonstrate their relative competence compared to the Opposition. So I don’t think that the national elections are going to yield a big surprise. But India is India and stranger things have happened. On the state level, that’s a different thing and all sorts of outcomes are possible. That said you will get some surprise at the national level, whether it’s just a breakdown of seats. But I don’t think the net result is going to be very different.
With US yields just below 5% , are US bonds a challenge to stocks?
It has to be said that 5% treasury yields – whether it’s near term or longer term – is not a bad return. Now, 5% nominal returns, when inflation is running a little lower, may not be too good. But it’s still not bad in a world that is uncertain. So, we are seeing people allocate to bonds to sleep easy at night. But we are also seeing people conclude that inflation is going to be in excess of 3%. If that’s the case, you don’t want to get it in the bond market.
What are your thoughts on the US Fed’s interest rate hike cycle ?
We’re going to see more like a plateau in interest rates. It will say relatively high; may not stay at peak levels, but they are not going to come down either. We are not seeing the impact of higher rates on the long end affecting markets yet. So, it’s right for the Fed to pause and wait for a while. But people who are expecting a peak in rates or a fall, are probably overly optimistic.
What are the odds of US recession?
We’ll get a bit of a slowdown because rates will bite and you can’t see this level of growth carry on for very much longer, but it’s not going to be a very sharp slowdown or a very sharp recession. That said, rates have gone up and somebody is feeling the pain. There is a repricing of assets going on, particularly in the US real estate market. Unsurprisingly, offices will be hit the worst. Now, will that have a ripple effect so that a significant chunk of the economy gets hurt? I don’t think so. Some will get badly burnt. The good thing about the US is that it has a self-correcting mechanism through long-term bond yields.
What is the impact of the Israel-Hamas conflict on markets?
It’s interesting that the equity markets and oil prices haven’t overreacted to it. So, the markets are suggesting that this will be contained. But it will be quite bad for the world if this thing blows up.
(The reporter was in Hong Kong at the invitation of Franklin Templeton)