Daily Voice | Digitisation must be in portfolio from a multi-year perspective, says this fund manager

In my view, there is around 25bps hike remaining in the current rate hike cycle. Rate hike will totally dependent on the Fed interpretation of a) inflation b) Unemployment and c) deterioration in economy. We have seen gradual disinflation in the US with the core PCE inflation slowing down by more than 100bps in last one year. However, the annual inflation rate accelerated slightly in July over June but still remained below the consensus forecasts.

US Unemployment rate has also firmed up slightly in August although it’s still below the long-term averages and hence the data from a trend point of view is encouraging but Fed may want to look at the future inflation data and then decide on the rate hike.

The pause may continue in the September policy meeting and the actual hike may happen in November. There could also be a scenario that the Fed may decide to not hike at all if the trend in inflation and unemployment are encouraging enough.

Q: Further, does it mean the Fed rates are likely to be higher for next one year at least?

Fed is targeting 2 percent inflation rate which seems farfetched. However, in light of this fact and also the past experience of 1970s when they decided to cut very fast, it backfired. Also, the GDP data from the US has been encouraging despite multi-decade high rates and this can give Fed the confidence that despite high rates soft landing could be the base case scenario for now.

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We may expect higher for longer policy as of now as they would want to look at a sustainable decline in inflation before thinking about rate reduction.

Q: If the Fed continues with rate hikes, will it be a major risk for emerging markets?

I don’t think we are going to see multiple rate hikes from here, however if the Fed decides to continue with multiple rate hikes then it would be due to inflation remaining high despite multi-decade high rates. Also emerging markets in my view are very well placed given superior demographics and better placed economies and hence I would not be overly concerned about these markets.

If we see multiple rate hikes then for some time the markets may suffer as the US demand may get significantly impaired and more US banks may get in to trouble. But this is not my base case.

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Q: Most experts are seeing the limited downside in IT space. Are you taking exposure to the IT names as the IT index is at more than a one-year high now?

After a big jump post COVID given digitisation initiatives by the corporates, we saw the Indian IT sector doing really well. However, with an expectation of US recession and Europe going into slowdown we saw a massive underperformance by the IT sector stocks.

I do not think IT sector can anyways be written off given that digitisation as a theme is structural and we also see the companies working very hard on AI (artificial intelligence). Hence, I am positive on the IT sector as I think the sector is going through a structural uptrend with the current downtrend being more of delay in decision making from the corporates.

The valuations in the sector is still palatable and hence we may see the sector performing. We have also seen research agencies talking about a recovery in growth in the next year. Many of the Indian IT company’s commentaries are also pointing towards the same.

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Q: Do you think China’s economic problems are deeper and there is a need for more than just a stimulus?

The Chinese economy, after showing a strong jump post reopening, has started to falter and now faces significant downside risk. China is facing challenges on multiple fronts such as a) the demography has become adverse with the country ageing population and higher unemployment in working age population, b) High level of ineptness in multiple sectors in the country may not allow the government a very high room to stimulate the economy by infusing a lot of liquidity, c) Housing market has been deflating and housing sector companies are showing sign of collapse with one of the largest property developers already filing for bankruptcy protection in the US, and d) Geo politics currently is not favoring China with Chinese response to the Russia-Ukraine war not helping its cause.

All these factors suggest the economic problems in China as of now are very deep rooted and may require much more that liquidity infusion by the Chinese government.

Q: One theme that must be a part of portfolio for a year ahead...

I think digitisation is one theme which must be there in the portfolio from a multi-year perspective.

This theme will be dominated by a) companies in the e-commerce space as India is one of the largest market in the world for e-commerce companies with almost 80 crore internet users. It is estimated that the online shoppers are just around 20 percent of the internet user. Hence, the market has huge potential to penetrate and b) Fintech, data points on credit card penetration, insurance penetration, and people participating in stock markets are all significantly lower than the developed economies. India has one of the most advanced payment systems and one of the best regulators globally, which could make this space exciting for the long term.

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