Markets India podcast September 2023
Host, Narayan Shroff, and Rahul Bajoria explore the reasons behind this current boom and ask if there’s even more to come.
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Is India the new global growth engine?
18 January 2024
India’s economy is taking giant leaps forward – inspiring hope amid a gloomy global outlook. In our latest podcast, we explore the reasons behind this current boom and why there’s potentially even more to come.
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Narayan Shroff (NS): Hello, and welcome everyone to our first podcast this year for Barclays Private Clients India. I’m Narayan Shroff, part of the India Investments team, and I will be your host today.
In this edition, I would refresh and provide an update on the India cross-asset strategy covered in our Investment Outlook 2024 published in November. I will then quiz our in-house guest speaker Julien Lafargue, Chief Market Strategist at Barclays Private Bank and Wealth Management, on our global investment outlook for the year.
As covered in our Outlook 2024 released a couple of months ago, we continue to remain overweight on Indian debt with a bias to add duration to the portfolio, and a target duration between four to five years.
Inflation-growth dynamics in India, US Fed guidance and US rate market trends, demand-supply balance for Indian bonds, including the impending flows from Indian government bonds’ inclusion in the Global Bond Index, all remain favourable. Upcoming interim Union Budget, or as we call it “vote on account”, is also not expected to bring in any surprises. While we expect rate cuts in India to start only by the third quarter of 2024, we suggest adding duration to portfolios now with an 18-months plus investment horizon.
We see better opportunities available in below AAA rated corporate bonds, especially the AA and A rated bonds offer attractive yields. These credit segments should continue to benefit from the favourable economic cycle in India as well as healthy corporate balance sheets. While credit spreads have contracted across the credit curve, spreads in the AA and A rated segments continue to remain attractive compared to their long-term historical averages. A barbell strategy, combining G-Secs for duration with their higher sensitivity to interest rate cuts, and below AAA rated corporate bonds for accruals looks appropriate to us.
For discerning investors, private credit could provide good risk premium. Indeed, this asset class tends to perform well at times of improving macroeconomic and corporate balance sheet cycles, as is currently the case in India. Within this segment, private credit backed by real estate should continue to do well, also considering the robust demand-supply dynamics being witnessed in the Indian real estate sector.
On Indian equities, as part of our tactical asset allocation, we moved to an overweight position in December as major overhangs like the US Fed’s interest rates stance as well as the Indian state election results were behind us, and we do not foresee any major new risks in the near future. Also, we expect the flows into Indian equities should remain healthy and expect the market momentum to remain positive. We suggest buying on dips, although we do not expect any deep corrections at this stage.
Growth in corporate earnings is likely to remain in double digits on the back of strong economic growth momentum. We expect it to be between 12% to 14% for fiscal year ‘25 for Nifty50 companies.
Although valuations remain higher than longer term averages, we believe that the valuation premium for Indian equities may continue to remain higher due to India’s relative growth play and considering increased foreign flows. With the Nifty India VIX remaining subdued between 12% to 14%, market sentiments remain well balanced, and we do not see signs of exuberance, nor do we any signs of complacency.
We find large cap valuations relatively attractive as earnings growth has not been fully priced in there and foreign flows can bring in upside movement there. Also, while mid and small cap valuations are rich, they remain attractive on the back of broader economic growth and very strong earnings growth in those segments. Overall, we remain neutral in our market cap preference and would suggest allocations in line with the broad market benchmarks such as the S&P BSE 500 index.
We continue to like domestic cyclical growth themes with a preference for sectors like financials, manufacturing, infra, capital goods and select consumer discretionary segments.
Similarly, after the price and time correction witnessed across venture capital and private equity investments, as well as deeper scrutiny on business models of the investee companies through the funding winter, 2024 looks well positioned to add such exposures to the portfolios.
With that, let me now invite Julien Lafargue to this discussion. Hi, Julien, thanks for joining us on this podcast today.
Julien Lafargue (JL): Thanks for having me, Narayan, and a very happy new year to you.
NS: Yeah, let me start by asking you some of the top questions in our investors’ minds. So, when do we expect the US Fed to pivot, and what would be the impact on dollar index and flows into risk assets like developed markets and emerging market equities?
JL: Well, on the Fed I think the “when” is somewhat less important than the “why”. As you alluded to, our global outlook calls for a moderation in growth and inflation. In other words, a softish landing. If this is the case, we would expect the Fed to start cutting interest rates around the middle of the year. At this time, inflation should be getting decidedly closer to the central bank’s target and the US economy should start showing signs of slowdown.
Now, of course, this is if we don’t have any major negative surprise in the meantime. In this scenario, the impact on the dollar and risk assets should be limited. The alternative scenario is that the Fed is forced to cut interest rates much more aggressively and earlier in the year. This, in our view, would happen only if the macroeconomic picture deteriorates significantly and would, therefore, have a negative implication for risk assets across the globe.
NS: Thanks, Julien. Let me get a bit deeper. Which equity markets do we like within the developed markets, and are there any themes or sectors we feel would be doing better than the market?
JL: Well, look, we’re very consistent in the way we think about investing. Over the medium term we believe that owning higher quality businesses that can consistently deliver superior growth should increase our chance of success, irrespective of the macroeconomic cycle. Now, that is for the medium term. In the shorter term, we believe that investors may need to revisit their exposure to introduce some defensive attributes. What do we mean by that? Well, sectors or markets that should show resilience in the face of a slowing global economy. Some examples would be tech companies, but also healthcare or even utilities. Utilities is really a bond proxy play for us and, as you know, we do expect rates to be lower 12 months from now.
NS: Thanks. In our global outlook for 2024, we specifically talk of India as a major growth driver globally. What is our strategy in capturing this growth? Do we see more interest amongst global institutions and large retail investors in investing in pure India plays?
JL: Clearly, India has been in the spotlight. This is a reflection of two main factors, I guess. First, India as an economy has done very well recently and, second, on a more relative basis, China keeps on disappointing. And this is important because global investors have been looking for alternative ways to play the growth in Asia and India has become the de facto substitute to China. So, yes, we want to have exposure to the Indian equity market but, given the recent run, I think investors need to be increasingly selective in their allocation.
NS: I agree. So, what are our views on oil and on gold in the year ahead?
JL: Well, this is a tough one. Predicting oil prices is a risky business. What I would say is that with oil prices between $70 and $90 per barrel, most people seem to be happy. It does not generate meaningful inflation, nor it constrains growth. So, our central scenario would be for oil prices to be bouncing around in this wide range with risks potentially being tilted to the upside given supply dynamics.
Now, when it comes to gold, we continue to view it as a key diversifier in portfolios. There has been a meaningful disconnect between real yields which have gone up and gold prices which have followed a similar trajectory and, usually, these two are negatively correlated. This may be the reflection of geopolitical risk premiums as well as the desire from major central banks, especially in emerging markets, to rebalance their holdings away from US linked securities like treasuries or the US dollar. And, a result, we could see some volatility in gold prices in the near term, especially if geopolitical tensions ease, but for the medium term and in the context of a diversified portfolio, we still think it makes sense to have exposure to this precious metal.
NS: Yeah, thanks, Julien. Finally, what are some of key events and risks we have our eyes on in this year, and how can investors navigate through these?
JL: Well, the most obvious one is growth and the trajectory for the global economy. At this point, markets seem to be happy with the idea that a significant slowdown will be averted. It may well be, but there is clearly a nontrivial chance that all the interest rate hikes we’ve seen in the last two years or so finally start to bite.
The other known unknowns for 2024 are the US presidential elections as well as the UK election, although it’s probably less relevant globally. And, of course, yourselves in India will also have to go to the polls later this year. But in the case of the US elections, it’s probably too early for investors to really worry about it. We think it will become a much bigger focus in the second half of the year.
Now, the biggest risk is the “curve ball” and I can say with confidence that 2024 is likely to have at least one, if not several, in store for us. A “curve ball” is an event that nobody sees coming, just like the pandemic or the war in Ukraine. And, unfortunately, because we can’t anticipate where or when it will come, really the only way we have to protect ourselves is via appropriate diversification.
NS: Thank you again, Julien, for joining us today. Those were some really great insights. With this, we come to an end of our podcast. We wish all our listeners and their loved ones a very happy and prosperous 2024.
Host, Narayan Shroff, and Rahul Bajoria explore the reasons behind this current boom and ask if there’s even more to come.
Listen now:
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