Daily Voice: Government to majorly focus on these 2 areas post general elections, says Rupen Rajguru, Julius Baer India

Do you see only modest headwinds, if any, for India, in the coming years?

Currently the stars are aligned for India from all three perspectives: 1. Macro (good governance + healthy banking system balance sheet); 2. Micro (strong corporate sector + household balance sheet); 3. Liquidity (large and sticky domestic flows + FPI flows are expected to improve).

Additionally, moderating inflation prints, range-bound crude prices, easing 10-year G-sec yields, a stable currency, and resilient corporate earnings are aiding the market sentiment. For the 9MFY23-24, the Nifty has posted healthy profitability growth of 25 percent, and we believe that for the next two years earnings growth would be in the mid-teens.

Nifty is trading at a 12-month forward P/E ratio of ~20X, which is slightly more than its long-term average even as the broader markets trade at expensive valuations (the NSE Midcap 100 index is trading at a ~33X).

In India, the consumption and investment sectors are trading at fair / rich valuations, while financials continue to trade at attractive / reasonable valuations. Additionally, megacaps have underperformed largecaps, midcaps, and smallcaps.

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We prefer largecaps and large midcaps versus small and microcaps, which are vulnerable to big drawdowns in case of a change in sentiment or liquidity. In the near term, markets will take cues from: 1) the outcome of the Lok Sabha elections in April / May 2024, and 2) the timing and the degree of easing in the interest rate cycle, both globally and in India.

Do you expect the robust domestic economic growth to continue in the coming financial year, though there is a possibility of a US slowdown?

At the start of the year, the consensus was that there would be a soft landing in the US economy, and seeing the labour market data,  corporate profitability, and commentary in the first two months of the calendar year, it looks like there is a higher probability of 'no landing' as in, the US economy would continue to be resilient. Nevertheless, irrespective of the US economic position, the Indian economy is on a strong wicket led by capex, manufacturing, and the real estate cycle.

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So, while there might be some dip in the growth of export-oriented sectors such as IT and chemicals, the overall structural growth opportunity stays, with India remaining an attractive low-cost destination for products and services.

Considering a policy continuation post the general elections, what would be the focus areas for the government?

The current government’s economic growth agenda has been premised on the three pillars of promoting domestic manufacturing, infrastructure development, and improving disposable income / consumption. The focus over the past few years has been on providing a conducive environment and necessary reforms to strengthen these pillars.

No doubt, the five-year period till 2020 was a bit painful as that was the implementation phase of some much needed policy reform and clean-up of the system, be it GST, RERA, IBC, demonetisation, etc. These created some near-term uncertainties and resets, and weighed on the overall economic environment.

However, the past few years have clearly been a phase wherein the country is benefiting from the re-adjustments, and it was further aided by the emerging opportunities from global uncertainties.

The third term of the government is likely to be a continuation of what we have seen in the past few years, but it could be in a more accelerated manner. Domestic manufacturing clearly remains a key focus area of the government, both for import substitution as well as positioning India as a ‘factory to the world.’ That will not only help in employment generation and overall development, but also be highly supportive for the currency. This will also lead to the much-needed revival of the private capex cycle.

Broad-based infrastructure development remains another focus area, as it remains a key enabler for manufacturing and tourism. Buoyant economic environment, aided by a strengthened financial system, and supported by increasing focus on improving farm income, would be a good way to improve income levels and domestic consumption. Especially in a country like India with a high share of young people of working age.

Do you think the US Fed is likely to stick to three interest rate cuts in 2024?

Globally, central banks have raised policy rates to restrictive levels. With inflation receding and economic activity slowing, policy rates have peaked in most economies, and the focus of the major central banks is turning towards easing.

However, the US economy continues to show remarkable resilience. Growth is likely to slow in the first two quarters of 2024, but nonetheless remain relatively solid. Recently, the US economy has posted relatively strong data, especially wrt service sector growth and the  job market. This has led the US Fed to think about rate cuts in 2024. We now expect a total rate cut of 75 basis points (bps) in 2024, but starting in H2CY24 and not from May. The inflation print for the next two months will be watched closely in this regard.

Do you think India will remain a good alternative to China for global investors in the coming years?

When global investors view China and India from an asset allocation perspective, two things have changed: the Chinese economy, which grew more than 10 percent per annum in early 2000s and was growing over 7 percent per annum a decade ago, has now slowed down significantly. The World Bank is projecting China's 2024 economic growth at 4.5 percent.

On the other hand, India is now the fastest growing large economy in the world — IMF projects India's growth to be 6.7 and 6.5 percent for FY24 and FY25, respectively. Additionally, the quality of growth in India has significantly improved. Capex spending has gone up 3X in last three-four years, which lays a strong foundation for higher growth in the next few years.

Secondly, over the past few years, there have been developments in China (crackdown by the government on educational institutions, the gaming industry, fintechs, etc., plus flipflops in lockdown policy during Covid) which has negatively impacted the sentiment of global investors towards China.

India has benefited from both these factors as reflected in the steady increase in its weightage in the MSCI EM index (18 percent now versus 9 percent three years back). We believe that this trend will continue for the next few years as global investors are finding India a good alternative to China.

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