Do you expect the markets to remain shaky for some more time?Whenever the economy sees a sharp surge in interest rates in a short span of time, it cannot come without impacting growth. Even if it gets delayed, it comes through eventually. There was a lot of chatter about recession in 2022 but it did not happen. The reason is that the stimuli extended post Covid left a lot of surplus in US household savings. That was a cushion for many households over the last year when interest rates shot up. But now, that buffer is coming down.
This means consumption or growth in the US will get pulled back somewhere down the line. So what we did not see happening in 2022 looks likely to transpire in 2023. The signs of slowdown are more intense now. India had started to slow at the end of 2022, after seeing strong growth on the low base of 2021. But India’s growth was peculiar—it has been firing on a single engine of urban-centric consumption.
The lower segments of the income pyramid have not participated. They have remained under a lot of pressure. Rural segments will take longer to recover after phase of high interest rates. Even though consumption has moderated, investment and manufacturing related parts of the economy have done much better. From a valuation standpoint, India got rewarded as it stood out among others. But we are now slowing down as well, and the valuation premium has come off.
Are the tremors around global banking space likely to grow louder?
When we have such large disturbances in terms of interest rates in a short period of time, accidents are bound to happen. This has manifested in the developed market banking space. We cannot rule out further conflagrations. But central banks around the world are very quick to douse the fires. I don’t think the current situation is anywhere close the 2008 GFC which hit the cream of the financial institutions at the outset. For now, the hit is more on the fringes. It doesn’t appear that this will start engulfing larger banks. As of now, we are not expecting a recession scenario in the US, but a slower world in 2023.Do you expect the RBI to continue with a pause in interest rate hikes?
A pause in interest rates was unexpected. We were expecting rate hikes to slow down during the first half of this year and then see a pause. But it has come a little early. The RBI seems to have brought it forward owing to the unfolding scenario for global banking system. How long we will remain in pause mode will depend on inflation. Most other central banks are likely to follow us into a pause.Going forward, the focus will be on managing liquidity rather than interest rates. Inflation is likely to remain within comfort levels, particularly if the slowdown takes effect. That will allow central banks to continue the rate pause for a while. If things start to get difficult towards the end of the year, that is when we could see some chatter around interest rate cuts or the rate cycle turning.
Which themes are you favouring now?
Consumption has always been a strong story for India. But you can’t take it at face value. I am concerned about how this theme will play out compared to the past. You need to see employment and incomes to rise. We have also not had a great investment cycle for a very long time. That can pull the brakes on consumption for longer than we think. The government’s focus rightly is on manufacturing and industrialisation. Its policies and spending are in that direction. We need that investment cycle to come through in the next few years.
It will lead to more jobs, higher income which can then feed into consumption. The elements are in place to jumpstart this cycle. Banks have the capacity to lend, policy initiatives are supportive and there is room for higher capacity utilisation. This makes me positive on the investment cycle for the next few years than the consumption space. The growth excitement remains on the other side of the table. What can surprise global investors is what India can do on the manufacturing and exports side. Many of our portfolios are also tilted to take advantage of this scenario.
Will growth companies remain out of market’s radar for longer?
The traditional growth sectors led by discretionary consumption are still seeing pressure. Rising competitive intensity is another challenge. I feel the growth angle will take some time to come back. While valuations in some of these pockets have come off, these are not exactly attractive yet. What was once value is now perceived as growth, and vice versa. Some of the industrials and beaten down cyclicals are now being equated to growth businesses. Many of our growth strategies are significantly overweight on industrials. Today, there is no pure value—nothing is so cheap that you can classify it as value. Many of the earlier value stories which have crossed into growth territory are now expensive. It is a tricky scenario.
Are you preferring any particular market cap segment now?
We are seeing bottom-up opportunities across the spectrum. The canvas is quite wide open. There is no polarisation between large and mid/small caps. There may be opportunity in the small cap space as they have trailed both large and mid caps over the past year. Valuations are more attractive in this space and we are scouting for good opportunities.
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