The world economy has been grappling with imbalances, including trade disparities and debt levels. These imbalances, if not addressed effectively, could contribute to economic headwinds.
In an interview with CNBC-TV18, Manishi Raychaudhuri, Head of Asia-Pacific Equity Strategy at BNP Paribas Securities, shared his perspective on what lies ahead for the global economy. Raychaudhuri believes that the first two quarters of 2024 might witness the emergence of a shallow recession.
Below is the verbatim transcript of the interview:
Q: Are we beginning a bit of a global correction, in your opinion? What is your global team’s view?
A: The correction began some time ago. It coincided, and not surprisingly, with the US bond yields spiking. In this particular case, it was accompanied, somewhat surprisingly, by global energy prices, oil prices, also going beyond $90 per bbl, now approaching $95 per bbl. And both these variables are actually not quite helpful for Asian equities, particularly Indian equities. We have seen consequently, the Asian currencies depreciating, and we think that this situation is likely to continue for some more time.
So, essentially, this is not really an India-specific phenomenon, we are seeing it across emerging markets. Whenever you have the US dollar appreciates, the US bond yields spike, and there is a flow of money in favour of safe-haven destinations like the US markets. And this kind of situation may continue for some more time. Now, having said this, India is in somewhat of a sweet spot when it comes to the protection that the market has because of domestic fund flows, this is something kind of unique to India, almost no other emerging market has this advantage to the extent that India does.
So, I would think that the entire emerging market complex, the Asian markets would possibly continue to have some correction that said, the outperformance by India, even in that corrective phase would likely continue.
Q: To labour on that point that you were making about the global markets getting into a tired, sideways movement, as you call it in your report, you are saying this, currently, what we are seeing is similar to what happened in 2000-2003. At that time, the market declined, and then it drifted throughout the Fed's rate cut period as concerns about a sharp economic slowdown became apparent. And the recovery started only after the Fed rate cuts were almost over, as the liquidity injected began seeping into the various financial assets. So are you saying we are in this grinding kind of period for a very long time, even as the Fed starts its rate-cutting cycle perhaps sometime next year, markets are still not going to react positively.
A: I would think that this tired, sideways movement, which is correctly quoted from my report, is likely to continue for maybe another three quarters or so till the middle of 2024. We are in exactly that phase, which we encountered from mid-2002 to mid-2003 where the markets were directionless, the earnings estimates were kind of coming down, but very selectively staying stable and we are possibly in that kind of a situation right now.
What would be necessitated to take the market out of fear, we clearly need to come out of the recession narrative and that narrative, unfortunately, is likely to continue until and unless the recession is actually over. Our global economics team thinks that that period will coincide with the first and second quarters of 2024, where we will have a shallow recession, which is a recession nonetheless, in the United States.
Mid-2024 would also coincide with hopefully by the end of this higher period for a longer period. We think there could possibly be one more rate hike in November, but after that, there will be an extended period of higher for longer, maybe for another three quarters and rate cuts would commence only in the second half of 2024. So, when I put all this together, the macro variables would turn favourable for risk assets, only in the second half of 2024 and till then, I am afraid, we may have to contend with this sideways movement.
Q: What about HDFC Bank? It has already been underperforming. It is not even sideways, it's actually down close to around 7 percent and in the last 10 years, we have not had a single year when HDFC Bank has given negative returns, and we just have three months to go. So, hopefully, it keeps that record in terms of positive closes in a calendar year. You have liked private sector banks, where does HDFC Bank feature in that list?
A: I would not obviously comment on stock specific here, but in general we do like the private sector banks in India, and we focus on those banks, which are gaining market share. The entire gamut of private sector banks in India are gaining market share over the PSU banks, but even within that set, there are a few which are actually more adept at cost-cutting because of the better technology that they have.
They are also gaining market share as a consequence of the better technology that they possess, and those are the banks that we are focusing on. So certainly, that is the story that would pan out, not just over the next one to three years, but even for much longer.
Q: We are in a place where oil prices are up 30 percent from June, the dollar is higher, etc, but on Friday, September 22, we got the global bond index news flow. So, should we look at the two big global variables for India - the dollar and oil - a little differently? It would still hurt, but maybe, to a lesser degree, what's your sense?
A: I do tend to agree with that. If one looks at the global bond index inclusion, from the debt markets we have the feedback that it would lead to anywhere between 25 and 30 billion inflows on the lower end of the estimate range and possibly somewhere around 45 to 50 billion on the higher end of the estimate range. So that's significant. And that inclusion is happening in June 2024, which would obviously have a salutary effect on the currency.
Now, that said it is going to be a long-drawn-out affair. It will basically pan out over the next 9-10 months and before that, we will have to contend with higher fuel prices. We must also keep in mind that we are entering the winter season where obviously, there is a degree of pressure on the oil prices in the upward direction. What we have to contend with is the near term, when oil prices would likely continue to be firm, we are entering the winter season now.
So, I think when it comes to this question of currency, there is a degree of difference between the near term and the longer term that investors would have to contend with.
Q: What are your thoughts on Indian industrials? In your portfolio, you do have holdings in L&T and BEL. So, you are playing the Indian industrial space. The question is, how long do you think this government capex will continue? They have been spending massively, but can we assume this kind of government spending for the next 3-5 years? Are we closer to the end of this upcycle in industrials or it has just gotten started, and you would play it for the next three to five years?
A: We would definitely play the government capex theme and therefore, the consequent spilling over into private capex; we must remember that private capex hasn't really started in a big way yet. You rightly point out and this is something we have been arguing as well that if you look at government capex in infrastructure, railways, in defence all put together, capex as a proportion of total government spend has skyrocketed over the last three years, it used to be about 17 percent of total government expenditure, it has gone to about 25-27 percent. The only risk to this could be a spike in the fiscal deficit. Now, if I look at the tax collection that we are witnessing at this point in time, that does not seem to be a very potent threat at this point of time.
So, looking at the government's intentions in terms of supporting capex and improving infrastructure. I would be willing to bet that this government capex would likely continue for over the next two to three years at least and the spillover effect into private capex would possibly accelerate. So yes, we are currently overweight, we have a significant allocation to Indian industrials in our model portfolio and we see no reason to alter that.
For more details, watch the accompanying video.
(Edited by : Sangam Singh)
First Published: Sept 25, 2023 3:52 PM IST
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