'No soft landing likely in the US': Neelkanth Mishra of Axis Bank

What's being ignored, he says, is that the US deficit has gone up from $1 trillion in FY22 to $2 trillion in FY23. "As emerging countries like India well know, a sharp cut in the deficit will hurt growth badly. "I don't think there's any chance of a soft landing," he said.

The US, Neelkanth explained, has changed its way of tackling declining growth. In 2008, it tried a loose monetary policy and tight fiscal policy and found it didn’t work. Growth stayed weak. So this time since covid, the US has changed to a tight monetary policy but loose fiscal.

However, a higher deficit means a higher term premium and higher bond yields at the longer end. But a lot of the financial instruments and structures that have been built up over the past decade were built during a period of zero interest rates, and some of these will collapse.

“There will be a point where it looks like things are falling apart. And then the Fed has to step in. The question is, will they step in early or will they allow some of the damage to happen…we have to wait to see how much damage are they willing to allow to happen before they step in, but I think it's time to stay cautious."

He added that US debt is running at 150% of GDP, and it’s a matter of time before the Fed starts buying treasuries.

So what does this mean for India? Neelkanth sees three channels through which India will get impacted: Firstly, services exports will decline; they already have, as one can see from IT earnings. Secondly, goods exports too will fall as the US is a big importer, and a US slowdown will also take the wind out of other importers from India. Finally, as US yields remain strong, global funds will rush to the US treasuries market. FDI and FPI flow into India are already falling and will fall further, nor will Indian corporates raise ECBs abroad.

"It would become very hard to finance even a $40-$50 billion current account deficit for India,” he said, adding that India is better off. A country like Indonesia has had to raise rates even though inflation is under control because of the interest rate differential with the US and the threat that it poses to the exchange rate.

Neelkanth’s advice is that traders must be nimble like players in a game of chess and respond to the Fed’s reaction to the imminently unfolding slowdown and other problems. Investors must stay invested but have to get accustomed to lower valuations of 16–17 times versus the current 20 times.

Neelkanth expects a long-term correction in the stock market. This means he sees the indexes and stock prices not rising much, with higher EPS growth getting neutralised by falling P/E.

However, individual companies will outperform the indexes. He favours power and power equipment companies given the power shortages and the growth in demand. He likes real estate companies given the start of the cycle, and he likes financials as they are the best plays on a domestic economy, which is still growing fine. In fact, unlike many economists who see India’s near-term growth at 6–6.5%, Neelkanth sees the Indian economy growing by 7% over the next five years given the improvement in labour productivity and investments in infrastructure.

Are banks loans fuelling exponential growth in equity derivatives?