DBS Bank Chief Investment Officer Hou Wey Fook says the Indian economy has a long way to go as far as infrastructure goes to show the world it can handle all the interest coming its way.
A sustained pick up in capex and widespread job creation are needed for India to live up to its compelling growth story, says Hou.
An engineer and CFA charter holder with over 30 years of fund management experience, Hou in an interview with Moneycontrol picks four sectors to look forward to in the year. Edited excerpts:
What are the factors that helped you decide to upgrade your US rating to overweight?
We expect the US to outperform its peers in the developed market given strong earnings momentum and peak Fed policy, which is positive for tech-related plays. Propelled by tailwinds from rising interest in artificial intelligence, we believe tech-related industries will remain on an upward trajectory should incoming inflation data remain benign. This, in turn, will underpin the outperformance of US equities over Europe and Japan, given its larger exposure to the tech-related segment.
Is gold in a sweet spot? Should one start to focus on companies that are beneficiaries of the gold rally?
Tailwinds from geopolitical risks and persistent central bank buying provide further upside for gold.
We analysed past risk-off incidents to see their effects on gold prices and found that such episodes resulted in gold rallies that lasted an average of 15 days and resulted in an average price increase of 8 percent.
The latest Middle East conflict corresponds neatly with this analysis; the rally lasted 15 days, and prices rose 9.5 percent trough to peak. Should there be signs of escalation and regional spread, we will likely see gold rally again in short bursts.
Additional tailwinds for gold can be found in central bank buying, which turned from net negative in April and May 2023 to net positive in June, July, and August 2023. After setting a first-half record in 1H23, central bank buying maintained its momentum and in July and August, taking 9M23 cumulative purchases to 800 tonnes.
Investors can gain exposure to gold via the following expressions: i) physical gold; ii) gold futures; iii) ETFs and managed funds on physical gold and gold mining equities; or iv) direct holdings in gold mining equities, which are essentially a leveraged expression of gold.
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Will the the US Federal Reserve cut the rate by 125 basis points (bps) in 2024, higher than 75 bps it hinted at? Will the cuts start in the second quarter of 2024?
The Fed will likely keep rates on hold (at current elevated levels) in the forthcoming months until recessionary signals emerge or when inflation starts to trend down. Financial conditions have been remarkably benign over the past few months amidst a perceived Fed pivot and lower rates. All the components of the index – credit spreads, short-term funding stresses, implied volatilities – all contributed to better sentiment.
Fundamentally, there are good reasons backing a more optimistic outlook. These include clear signs that the Fed is on a pause, inflation is generally falling and economic activity appears resilient.
Accordingly, the soft landing/Goldilocks dynamic that has been in play since Q3-CY23 may yet extend. Short of clear signs of slowdown or financial market stress, we think 100 bps in the second half is more likely.
Nonetheless, we are watchful of potential risks that could shift the narrative. Rates are remarkably attuned to data at this stage in the cycle. Risks to growth and inflation appear balanced, and weekly jobs data and CPI data may yet skew rates.
Do you expect a soft landing in the US?
Given the absence of structural imbalances among households and companies, a US economic “soft landing” remains our base case scenario. While slower economic growth and inflation rate point to a peak in US rates in 2024, the burden of elevated rates weighs on demand in the US and EU but a recession is unlikely in either area given their economic resilience.
A gradual softening of the US labour market materialises in moderation of consumption demand; similarly, in the Euro Area, growth flattens in the core economies.
In Asia, China continues to address issues related to its property and tech sectors while keeping growth above 4 percent.
With respect to Asean countries, we see a 50bps pick-up in annual real GDP growth, driven by a bottoming of the electronics export cycle and continued recovery in travel and tourism.
This scenario is contingent on an orderly financial sector. Liquidity stays ample despite quantitative tightening, US treasuries remain well bid by the private sector, USD weakens, and commodity markets stabilise.
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Are you super bullish on technology and consumer discretionary sectors?
For the US, we are overweight on tech and neutral consumer discretionary. The tech sector will benefit from tailwinds such as rising interest in AI.
Do you see global investors increasing exposure significantly to India?
Despite challenges such as elevated oil prices, uneven private sector investments and a hawkish Fed driving overall volatility in financial markets, India’s economy stayed resilient, powered by its rapid growth (GDP growth is expected to average 6-6.5 percent YoY in FY24), massive working-age labour force and rising manufacturing prowess.
Supportive policies add further tailwinds; positive liquidity conditions amid bets of Fed rate cuts in 2024 and an accommodative central bank policy continue to drive growth. Widely seen as a prime alternative in the ‘China+1’ strategy, India has also built a reputation as a prime offshoring location.
Amid high valuations, investors continue to plow cash into India’s stock market; overseas funds poured more than $21 billion into India shares in 2023, helping the S&P BSE Sensex Index cap an eighth consecutive year of gains.
India still has a long way to go in its infrastructure to show the world it can handle all the interest that is coming its way – a sustained pick up in capex and widespread job creation are needed for India to live up to its compelling growth story.
On the India front, which are the themes that are on your radar for a portfolio or investment?
These are India’s sectoral jewels to look out for:
IT services
India, with its multiple homegrown IT services powerhouses, will benefit as the global digital economy expands. A financial analysis we conducted of the Top 5 IT services companies in India (Tata Consultancy Services, Infosys, Wipro, Tech Mahindra, and HCL Technologies) found that the collective revenue of these companies grew nearly three times between 2010 and 2021. Net profits have followed a similar trend. The sector offers a million-strong workforce and has a robust capital structure.
Banking sector
India’s banking sector has grown substantially over the past decade. The country’s strong economic growth helped to grow middle-class wealth and income, which in turn led to rising consumption and demand for credit.
Total banking assets grew from $2.2 trillion in 2020 to $2.7 trillion in 2022. Against this backdrop of steady growth, we expect an increase in demand for both corporate and retail loans, especially in the areas of services, consumer durables, agriculture, and real estate.
Consumer staples sector
As the most populous nation in the world, demographic factors will continue to be an important growth driver for the consumer staples sector in India. FMCG is the fourth largest sector in India’s economy, and many global FMCG giants have set up locally incorporated subsidiaries in India to tap on the local market. The sector was worth $110 billion in 2020 and is set to double in size by 2025.
Pharmaceuticals
According to projections by OECD, India’s pharmaceutical industry is expected to grow 232 percent from 2017 to 2030, driven by tailwinds including rising incomes, improving healthcare infrastructure, and crucial government policies.
India currently accounts for 20 percent of global pharmaceutical exports and 30 percent of the US’s generic drug imports. It is worth noting that India has the largest number of pharmaceutical units (over 200) located outside the US and approved by the US FDA.
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