Narayan Shroff (NS): Hello, and welcome everyone to our monthly podcast for Barclays Private Clients India. I am Narayan Shroff, part of the India Investments team, and I will be your host for this podcast.
In this month’s podcast I will share with you a broad synopsis of our India outlook for the period ahead, followed by a short interview with our in house guest Jean-Damien Marie, Global Co-Head of Investments at Barclays Private Bank. Jean-Damien will share with us our global market views and strategy and some of the interesting medium to long term themes. He would also share his observations on the investment strategies and behaviour that some of our large global investors and family offices are applying in this very volatile period.
Volatility continues to be the order of the day as the world toggles between the geopolitical risks, inflationary prints and expectations, and impending monetary policy actions by central banks across the globe. Pockets of resurgence in COVID-19 cases across few countries do not seem to be catching much attention of the investors amongst such chaos.
From India’s perspective, the key immediate concern lies in its imports basket, especially energy, edible oils and fertilisers. If higher prices remain persistent, the second order impact on services like transportation may also add to this pressure.
However, we think that the effects of these price rises will be contained when it comes to inflation in India. Retail prices in India can be shielded somewhat through fiscal measures. For example, fertiliser subsidies may be increased, excise duties on gasoline may be reduced, and the government may contemplate providing subsidised cooking oil or reducing import taxes on them in the interim. In such a scenario, while we do not see the government raising its fiscal deficit target any time soon, fiscal pressures are likely to stay elevated.
The impact of geopolitical conflict and surge in prices of goods on consumer and business confidence and on domestic demand recovery, therefore, needs to be watched more closely. As of now, a robust recovery in economic activity in India post the pandemic seems to be overshadowing such concerns.
The lower growth, higher inflation backdrop will likely complicate policy decisions for the Reserve Bank of India (RBI). As it continues to support a nascent recovery in the economy, we think vigilance on inflation will increase but policy path may not change materially. However, the Indian bond market participants keenly await some guidance on how the RBI, as a banker to the government, plans to manage a high supply of government bonds in the current fiscal year.
We reiterate the importance of diversification, time in market rather than timing the market, and active management, especially in such volatile markets. It may also help to refresh some of the medium term themes that we highlighted in our India Outlook 2022 that continue to look attractive and may help navigate through the noise in the markets at the moment.
The first theme was quality leaders. These businesses benefit from formalisation of the economy, business resilience, stronger balance sheets, industry consolidation, lower cost of capital and better pricing power.
Banking and financial services are the economic growth proxies, have stronger balance sheets than before, and benefit from credit pickup, rates pickup and growing financialisaton and digitisation in India.
Technology or Digital 2.0. These continue to benefit from increasing technology adoption and global demand, new economy technology and tech enabled businesses, strong policy support, growing start up and tech savvy ecosystem.
Real estate, infrastructure and allied sectors. After years, this sector seems to have a favourable demand/supply mix, better regulations, increased affordability, industry consolidation, institutional participation and a growing REITs and InvITs market fuelling a virtuous cycle.
In manufacturing the government reforms, focus and incentives, favourable capex cycle, global supply chain substitution benefits, cost competitiveness, strong domestic market alongside exports are all going to help ignite the critical growth engine in this country.
Late recovery themes. As mobility restrictions ease fully, spending on contact intensive leisure, travel, hospitality, retail and entertainment is likely to increase.
Green ecosystem. Energy price spikes, global net zero aims, green energy production, storage and transmission, greener production technology and efficiencies, eMobility ecosystem, waste management and recycling, including eWaste, have miles to go in the country and in financial markets.
And finally, high yield and structured credit. Broader economic recovery, risk appetite still muted, demand far outweighing supply traditionally less affected by rate hiking or normalisation cycles, these all make the risk premiums available in this segment attractive. However, prudent selection, diversification and monitoring remain key.
While in near term pressures from rising input costs and interest rates remain in most of these themes, the medium term trends remain quite strong and make good investment case. Investment opportunities in these themes are available across asset classes as well as across both public and private markets.
On this note, we now have Jean-Damien with us.
JD, thank you for joining me on this podcast. What are some of the medium to long term investment themes we see playing out globally?
Jean-Damien Marie (JDM): Hi, Narayan. Structural changes such as deglobalisation, the need for more sustainable sources of energy, and the digitalisation of the economy are all very much alive. So from an investments perspective, with record levels of debt and deficits and with global central banks on the move, we continue to expect higher levels of volatility. Finally, the current environment is reinforcing the importance of maintaining solid balance sheets and the ability to generate free cashflows throughout companies.
NS: JD, have the black swan events such as the pandemic or the ongoing geopolitical tensions changed the velocity or the direction of these themes?
JDM: Well, you know, Narayan, because those themes I just referred to are structural in nature they cannot be easily reversed. So in fact, they tend to accelerate during crises, because difficult times give reasons for companies, governments and investors alike to reassess their priorities and to adapt to the new world order that may emerge from black swan events. In addition, these long term trends give investors something to hang on to in periods of uncertainty. In that sense, whether it’s on the back of the pandemic or the current tensions in Eastern Europe, if anything, we’re witnessing an increased focus on those long term structural themes.
NS: Thanks, JD. What is our view on global equities, on commodities and real assets?
JDM: Well, you know, Narayan, you’ll remember at the start of the year we argued that investors should expect lower returns ahead. So this view hasn’t changed. While the recent pullback offers some scope for a rebound beyond what we continue to expect the valuations and limited earnings growth to cap the upside. This reinforces the need to improve diversification and look for alternative opportunities outside of stocks and bonds in our mind. Commodities and real assets, they’re clearly part of this expanded investment universe that could help portfolios better navigate the current environment. This is particularly true at a time when inflation is likely to remain elevated for longer than many had expected.
NS: JD, what is the perception of Indian markets amongst investors globally? Is it still largely looked at as part of the EM or Asia allocations or do we see it emerging as a standalone case for investments?
JDM: Yeah, thanks, Narayan, this is a great question and you summarised the opportunities in India well. I think it is, indeed, the fastest growing large economy with a big domestic consumer market. So, from our global investors’ perspective I’d say that they mostly look at investing through their, indeed, EM/Asia allocations.
However, we do see increased interest, especially amongst more sophisticated clients and clients of Indian origin, to get access to the Indian listed equity markets through more domestic bottom up fundamental portfolios. We also have seen good interest among those investors in the Indian start up, venture capital and private equity space. Especially, a lot of the new age technology companies in India have caught global investors’ attention on large and successful listings.
NS: Yeah, thanks, JD. Do you see more opportunities in global private markets? Where do we see more interest emerging in this space?
JDM: Yeah, thanks, Narayan. As I mentioned earlier, any investment outside of stocks and bonds should be considered in the current environment. So private assets are definitely on this list and their ability to dampen volatility and to generate attractive returns over the medium term is certainly of appeal. So here again, however, you know, the key is to be selective. We’ve seen valuations balloon in parts of this market too as investors are chasing returns, so it’s critical to remain vigilant when investing in private markets.
NS: JD, considering the more recent vintage of growth in private markets in India compared to the western developed markets, are there learnings that Indian investors can adopt when building up a meaningful portfolio in this space?
JDM: Yes, you know, Narayan, I think diversification is always key and not just in terms of the private investments that are being pursued but also in terms of how they fit with a broader portfolio. So concentrating bets in a unique industry or geography limits the diversification benefits and increases risks that something may go wrong and impact the whole portfolio.
In an environment where returns are subdued, it’s really vital not to be blinded by promises of exceptional performance. We think that it’s always a matter of maximising rewards while limiting risks, but you cannot have one without the other. So most of the more sophisticated family offices are also well aware of their capabilities and constraints in handling difficult direct investments, so they select and they partner well.
NS: JD, in your long career in private banking and investment management, what have you observed large and successful investors and family offices doing differently in such uncertain environment?
JDM: Well, from my experience they do not panic and they remain focused on their long term goals. It’s a very difficult journey, not to say impossible, to consistently find yourself on the right side of each trade. This is even more the case in volatile environments such as the one we are going through at the moment. Sometimes actually doing nothing is the best thing to do. Let the noise fade, focus on your long term objective and let time do the work for you.
NS: Thank you again, JD, for joining us today. With this, we come to an end of our podcast. Thank you for listening to us and happy investing.