Delayed impact of higher interest rates on the economies is perhaps a bigger threat for the markets around the world than geopolitics, believes Mark Matthews of Julius Baer. Usually, it takes around a year for higher rates to trickle down into economies, he mentions in an interview to Moneycontrol.
On corporate earnings, the research head for Asia, backed by around 27 years of journey in the banking and financial space, says the first half of FY24 earnings growth in India was over 20 percent on-year, and it will slow down in the second half, taking the overall FY2023-24 earnings growth to around 17 percent.
"That is a very respectable number compared to earnings growth in the rest of the world," Matthews says. Excerpts from the interactions:
There are raging wars on two fronts at the moment. How do you see geopolitics affecting the markets/
While they are clearly bad, we don’t see geopolitics as a constraint on equity market performance, outside of China. Geopolitics have, in fact, seldom been a direct factor in financial market investing, although they can have indirect consequences further down the road, that are only possible to see in retrospect.
A more important risk factor for markets than geopolitics is the delayed impact of higher interest rates on economies. It usually takes around a year for higher rates to trickle down into economies.
What about the chances of the US slipping into a recession?
Economists can see trouble on the horizon, but have a poor track record in forecasting when it becomes bad enough that there’s a recession. As a case in point, most economists expected a recession this year, yet there was none. While the inverted treasury yield curve has historically been a good barometer of impending recessions, and it has been inverted for a year now, the current inversion is due to the low term premium, an anomaly of pandemic-related stimulus.
With the US private sector surplus at 7 percent of GDP, we think the US economy is experiencing the opposite of a “balance sheet recession” – in fact it’s closer to a “balance sheet boom”. So we do not expect a recession next year, and look for US GDP growth of 1.1 percent next year, down from 2.2 percent this year. For the world, we look for 2.4 percent GDP growth next year, down from 2.9 percent this year.
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Do you think the Fed is done with the rate hikes and, do you see a rate-cut cycle kicking off in the second half 2024?
We believe the last rate hike was in July and the first rate cut will be in September next year, followed by several more rate cuts until a terminal rate of 4.5 percent by mid-2025.
For reasons that are not entirely clear, the Federal Reserve is reluctant to explicitly state that it won’t raise rates any more. Perhaps it wants to send a message to the Federal government that if it continues to expand the deficit (something most people are not in favour of), it will have to pay higher interest costs. Or, perhaps it doesn’t want to be embarrassed in case there is a second wave of inflation, which is what happened in 2008 to then-Fed chairman Ben Bernanke.
How about the global economic growth?
We look for a global GDP growth of 2.4 percent for the next year, down from 2.9 percent this year. For China, we expect 4.4 percent, down from 5.2 percent and, for Europe, 0.4 percent, down from 0.5 percent.
What are the chances for India to reach the 6.5 percent growth forecast for FY24 announced by the RBI?
We expect 6.1 percent GDP growth in India next year, so more or less in line with the RBI’s forecast.
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Two key sectors/themes that must be part of portfolio for next one year and why?
US investment Grade corporate bonds yield around 6.5 percent. The cushion with that kind of yield is high enough that an investor will not lose money in them on a 12-month view, unless the yield rises at least another 100 basis points.
With economies slowing and inflation benign, we don’t see that happening. If the opposite happens and yields go down, investors will also benefit from capital appreciation.
In stocks, we think US mega cap technology stocks will continue to outperform the broader market. Their growth is structural in nature, not cyclical.
General elections are around the corner. What's you take?
I think the current government will continue after the elections next year.
Do you think the Indian equity markets still expensive?
With mid and small-caps up 20-30 percent year-to-date, they are in general expensive. But the broader market is only up 7 percent year-to-date, which is far below the 21 percent earnings growth of H1. So at an index level Indian stocks trade at 19x price/earnings, which is in line with their long-term average, and therefore not expensive.
What about the FII flow into emerging markets, including India?
If the dollar softens next year as is our expectation, and Chinese stocks remain off-limits to foreign investors due to geo-politics and the slow economy there, then foreign money should flow to Indian stocks. But we also think the US market will do well again next year, and as long as that is the case, most investors will be content to remain there.
Do you see stronger earnings growth in the second half of FY24?
The H1 earnings growth in India was over 20 percent YoY, and we expect 2H to be lower, taking overall FY2023-24 earnings growth to around 17 percent. That is a very respectable number compared to earnings growth in the rest of the world.
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