In an interview with Moneycontrol, Hou Wey Fook, the Chief Investment Officer at DBS Bank, expresses his favorable stance on certain sectors in India. He states that the IT services sector is poised to benefit from the ongoing global trend of digital transformation. Additionally, he highlights the consumer staples and banking sectors as advantageous due to the substantial domestically-driven consumption.
From the long-term perspective, he believes India’s progress will continue to be one of the pillars of Asia’s wider growth story for the coming decade, fueled by its demographic windfall.
On US inflation, this engineer and CFA charter holder with over 30 years of fund management experience, says DBS is still concerned about inflation and believes it is unlikely to return to the 2 percent inflation target in the near term.
Q: What is your take on the AI revolution as an investment theme?
It is no exaggeration to say that the AI (artificial intelligence) revolution will be a pivotal event in the history of mankind. It will fundamentally change the way we live, work, and play. Similar to previous technological advancements, it will bring about a new wave of productivity gains but not without disrupting industries and reorganizing labour markets.
We believe that this will be a long-term trend that will shape investment markets for years to come. There are four major themes that we believe will emerge as long-term beneficiaries of AI adoption:
1) Big Tech: The big will only get bigger. With access to massive datasets, vast computing power to train AI models, as well as deep pockets to sustain high running costs and make strategic acquisitions, Big Tech companies look to be clear winners in this new AI age.
2) Integrated circuits (chip designers + semiconductor foundries): Semiconductors are the foundational bricks of the digital world: CPUs, GPUs, ASICs, and FPGAs together will form the hardware backbone on which AI models will run. As AI adoption becomes more widespread, the demand for the aforementioned chipsets will accordingly increase.
3) Cloud platforms: AI models, after being sufficiently trained, will be deployed on cloud platforms for ease of access by a general user base through an API. A proliferation of AI models will give rise to a demand for cloud companies to host them.
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4) Cybersecurity: The abilities of AI are a double-edged sword; just as it can be used for productive ends, it can easily be used to spread misinformation, bring about data privacy and confidentiality issues, and expose digital security weaknesses. The new threats presented by AI will necessitate enhanced cybersecurity capabilities moving forward.
Q: Despite the current headwinds, are you bullish on the IT space?
We continue to like the IT services space; notwithstanding a more challenging macroeconomic backdrop due to global monetary tightening, this sector will nonetheless be a beneficiary of the long-term secular trend of global digital transformation.
It is also worth noting that the IT services sector in India derives c. 60 percent of its revenue from the US, and at the moment, the US economy seems to be highly resilient despite the 525bps worth of rate hikes that have been implemented since last year. Labour markets continue to remain resilient, core inflation is sticky to the upside, and while margins have faced compression, topline growth has remained positive for many companies.
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From that perspective, the end demand for IT services looks well supported. Moreover, the IT services sector in India continues to be propped up by a ready pool of tech talent and relatively lower energy costs.
Q: Can you explain the reasons for the shallow recession in the US instead of a deep recession?
We believe the US recession, if there is one, is going to be a mild recession. This is due to resilient consumption and the services sector arising from a strong household balance sheet. The services sector comprises 70 percent of the US economy.
Q: Do you believe the US dollar is a good long-term hedge?
We think the reserve currency and global transactional currency status of the US dollar is likely to remain strong for the next 10 to 20 years due to the vast liquidity requirement needed for such use.
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While working plans on the petroyuan, CNY currency swap agreements, central bank digital currency (CBDC) are progressing, and threats of sanctions are rising from geopolitical and trade tensions, we believe these are only tail risk scenarios for the availability of an alternative currency to be able to replace the USD.
Q: Are you still concerned about inflation and do you expect two more rate hikes by the Fed in the remaining calendar year?
We are still concerned about inflation and believe it is unlikely to return to the 2 percent inflation target in the near term. This is due to deglobalization and localization, energy transition trends pushing up costs, and the resilient household driving up demand.
Meanwhile, climate changes pushing up food prices cannot be ignored. As a result, we believe the Fed is not likely to cut rates soon, and it may have to change its 2 percent inflation target mandate.
Q: Do you anticipate a sharp and sustainable rebound in China? Are you expecting significant stimulus to boost the economy?
We expect a sustainable rebound in China but not a sharp one. The reopening in China is likely to be gradual to avoid the pitfalls of high inflation when supply and demand both squeezes at the same time, which happened in the West.
Meanwhile, the priority set on domestic consumption is unlikely to see a sudden reopening of the economy, but in a planned and controlled manner.
Q: What is your perspective on India's growth story considering the easing headwinds?
Our long-term perspective is that India’s progress will continue to be one of the pillars of Asia’s wider growth story for the coming decade, fueled by its demographic windfall. Having overtaken China as the most populous nation in the world and having a low age-dependency ratio vis-à-vis the rest of the world provides evidence of India’s fast-growing and youthful population.
On a more immediate basis, we believe that the macroeconomic environment has also eased up slightly. Supply chain tailwinds have lifted exports and production, with electronics among the fastest-growing segments, and the RBI has also implemented a timely pause in June, keeping the repo rate unchanged at 6.5 percent.
Q: Which sectors in India do you recommend for investment?
We like the IT services sector as it is a beneficiary of the global secular trend of digital transformation, the consumer staples and banking sectors as they benefit from the large consumption-centric population domestically, and the pharmaceutical sector due to supportive government policy and investment.
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Q: Are you bullish on the Indian pharma space?
We like the Indian Pharmaceutical sector for the following reasons:
1) Legacy policy: the ‘process patent’, which was introduced by the Indian government in the 1970s, gave the sector an advantage as it allowed Indian pharmaceutical companies to reverse engineer patented drugs under the notion that the process of production was not the same as the one adopted by the originator company. Notwithstanding that this policy has since been abolished, generic drug makers are still allowed to manufacture drugs that are off-patent or were patented before 1995.
2) Exports support demand for generics: India is one of the largest manufacturers and exporters of generic drugs globally, and with cost consciousness rising to the forefront due to tightening conditions worldwide, the demand for generics could see a further uptick. Product-linked investment (PLI) scheme beneficiary – Pharmaceuticals is one of the industries that benefit from the PLI scheme. Under this scheme, companies and governments will collectively invest more than c.$1.2 billion into enhancing and growing domestic drug manufacturing capabilities.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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