‘Hindenburg-Adani will become yesterday’s news’
‘The market will focus on the fact that India does have strong earnings growth this year.’
The Indian stock market does not normally get talked about a lot in the major financial centres.
Now it is, unfortunately for all the wrong reasons, says Mark Matthews, head of research for Asia, Julius Baer, in conversation with Puneet Wadhwa/Business Standard.
How do you see global equity markets play out in the remainder of Calendar 2023?
Equity markets across the globe fell in 2022 due to sharp monetary tightening by central banks, especially the US Federal Reserve.
There is a lag effect between when rates rise and the impact they have on the economy, and many economists are calling for a recession sometime this year.
Correspondingly, the consensus forecast for the S&P 500 Index earnings growth this year is zero, and will probably turn negative soon.
Yet we find that years with negative earnings growth are also years when the stock market rises.
The market is always looking ahead.
In 2022, it thought about a recession in 2023. This year, it is thinking about a recovery next year.
Some experts see the Fed cutting rates later this year.
The Fed Funds Rate is currently at 4.75 per cent and we forecast it will remain at this level through the first half of 2023, before returning to around 4.25 per cent in a year.
As for other central banks, the bulk of tightening is behind them.
The Bank of Canada was the first of the major central banks to begin raising rates last year; in its summary of deliberations released last week, it signalled a pause in rate hikes.
We could take that as a sign that others will, by and large, follow. That includes the Reserve Bank of India, where we expect actions to slow considerably in the first half.
How do you see the dollar index play out over the next few months?
The period from December through September last year was one of the strongest bull markets for the US dollar since World War II.
With interest rate tailwinds starting to ease, we do not see that strength returning.
Both stocks and bonds will extend the gains they have had so far this year into the full year.
Yields in US investment grade bonds at around 5 per cent are generous enough to not necessarily go out the risk curve.
If we are right that rates are peaking and will come down, then bonds with a longer duration will see more capital gains than lower-quality bonds that tend to have a shorter duration.
Should one shift from equities to bonds then?
In equities, it is not yet possible to identify sector leadership.
The consensus at the beginning of the year was to be defensively invested, yet year-to-date growth is up over 10 per cent, and value up less than 3 per cent.
We would, therefore, recommend broad exposure rather than trying to be selective.
Will money continue to chase Chinese markets instead of India over the next few months?
Fund flows suggest foreign buying of Chinese equities has been purely short-covering rather than long-only investors deciding to go back into that market.
It is clear the Chinese authorities have put Covid behind them, and are doing a lot to encourage their economy to grow.
Notwithstanding its 45 per cent rise since November, it is also still a cheap market.
Going against it is geopolitics. Those appeared to be improving with the appointment of a new foreign minister last month, but suddenly they have turned for the worse again with the mysterious incursions into North American airspace.
Have Adani group developments put India on the back burner for foreign investors?
Yes, they have, as the Indian stock market does not normally get talked about a lot in the major financial centres.
Now it is, unfortunately for all the wrong reasons. But investors who know India will also know that its market is large and diversified, and its population large and youthful.
Usually, those two things do not come together — in other words, other countries with large and youthful populations tend to have small and unvaried markets.
That makes it special, and that is why we continue to like it.
What is your exposure to Indian markets?
We like the Indian market, notwithstanding its poor start this year.
The Hindenburg-Adani Group affair will eventually become yesterday’s news, and the market will focus on the fact that India does have strong earnings growth this year, unlike most other countries in the world.
We are overweight on Indian equities and have been since March last year.
The four themes that we are looking at this year are banking, financial services and insurance, manufacturing, rural markets, and aspirational India (premium consumption).
Feature Presentation: Rajesh Alva/Rediff.com
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