Julius Baer India maintains a constructive outlook on the domestic economy and equity markets over the medium to long term, said Milind Muchhala, Executive Director, in an interview with Moneycontrol.
He believes India remains an oasis of growth in the global environment.
In the Iran-Israel conflict, according to him, the key things to watch out for will be the magnitude of the conflict, the longevity of the conflict and whether there are any disruptions in supply chains, especially in the Strait of Hormuz.
He would look at any interim corrections due to the geopolitical conflict as an opportunity to add equities exposure. Here are the edited excerpts from the interview
Do you think there has been no major impact on inflation from the Iran-Israel conflict (which lifted oil prices), and that there is also no reason to be bearish on equities?
The world has been struggling with geopolitical conflicts for the past more than three years, starting with the Russia-Ukraine conflict (which still continues), which got followed by the Israel-Hamas conflict and the latest being the Israel-Iran conflict. The crude oil prices have naturally spiked up by around 20% as a knee-jerk reaction since the start of the conflict, after a steady state decline that we saw over the past one year.
The key things to watch out for will be the magnitude of the conflict (whether more/larger countries join, whether it becomes a regional conflict, or it remains confided to just the two nations), the longevity of the conflict and whether there are any disruptions in supply chains, especially in the Strait of Hormuz.
Although there are threats of escalation, the ample storage and plentiful spare capacity bolster oil’s supply resilience, which coupled with a soft demand environment should ensure moderation in oil prices albeit the recent spike. Hence, the impact on inflation is expected to remain marginal, although some regions such as US could be slightly more challenged on the inflation front amid a weak USD and tariff tantrums.
On the other hand, India has been witnessing quite encouraging trends with a benign inflationary environment, led by soft food prices, which has aided a softening bias by the RBI. Hence, at the current juncture, we remain constructive on equities, and would look at any interim corrections due to the geopolitical conflict as an opportunity to add equities exposure.
Do you believe that the market can reach a new high only when there is a strong earnings recovery in sight? Until then, will consolidation continue?
As we all know, markets in the longer term are slaves of earnings, although it can always see some overshooting in the short term based on sentiment and technical factors. Over the past one year, the markets have been largely consolidating, albeit the intermittent volatility, primarily because the valuations had run a bit ahead of fundamentals (with euphoria in some pockets) while the growth had started faltering amid various challenges including slowing government capex, weak consumption, tight monetary conditions, etc., leading to concerns on possible cut in earnings estimates.
However, a lot of the factors have turned positive at the margin over the past couple of months - the Government capex has revived strongly since December 2024, the RBI has provided a monetary bazooka, the outlook for monsoon is positive, domestic consumption is expected to pick up, etc. All these should culminate into improved earnings momentum in the coming quarters, albeit a muted single digit growth in FY25.
However, we believe that the markets might prefer to wait for more visibility to be established on the growth front before pricing it in. Hence, we expect the consolidation phase to continue for a quarter or two before the markets start eyeing the record high levels. The upside risk to this view could be in case the FPIs turn aggressive buyers in the Indian markets due to global factors including improving appetite for equities or higher allocations to Emerging Markets.
Do you strongly believe that the domestic story is much stronger than the global one?
We remain quite positive on the domestic economy and the Indian equity markets over the period. India remains an oasis of growth in the global environment, and the various other factors including stable government, policy continuity, favourable demographics, skilled labour, robust financial system, healthy forex reserves, fiscal discipline, etc. further strengthens the country’s attractiveness.
India seems to be least impacted by the tariff uncertainties, and in fact it could emerge as a beneficiary in case of some realignment of global supply chains. As mentioned earlier, the domestic macroeconomic situation seems to be getting in a good shape, while India also seems to be much lesser vulnerable to global shocks. The country’s relatively superior economic and corporate earnings growth would position India as an attractive investment destination, and we remain quite sanguine on the Indian markets.
Do you expect a pickup in the urban consumption segment in the upcoming quarters?
While rural demand has been seeing steadily improving trends over the past few quarters, urban demand, especially in the mid-segment, has been a sore point in the domestic consumption story. This can be attributed to several factors, including high inflation, over leverage (multiple EMIs), slower pace of income growth, some weakening of (equity-related) wealth effect, etc.
However, we remain hopeful of a recovery in urban demand over the next few months with several factors coming in play – the income tax cuts in the Union Budget (leading to higher family surplus), benign inflationary environment, the recent cuts in the interest rates and the subsequent monetary transmission (leading to lowering of EMI burden), a natural deleveraging cycle over the period with payment of EMIs, and a supportive macro environment. Hence, we expect a distinct pick up in urban consumption over the next couple of quarters.
Are you still bullish on the capex and infrastructure themes?
We remain constructive on the capex and infrastructure themes, although the growth opportunities could be more prominent in some segments such as power, renewables, defence, railways, etc. While the Government has been doing the heavy lifting for investment and creating a virtuous environment for growth, the private sector is expected to join the growth capex with a gradually improving consumption/capacity utilisation, and the increasing thrust on domestic manufacturing. India, as a country, still lacks the desired infrastructure to emerge as a dominant manufacturing hub in the global context, thereby providing significant growth opportunities.
Moreover, the Government’s increasing focus on indigenisation and providing incentives to promote domestic manufacturing is also likely to create growth opportunities. Hence, overall we continue to like the theme, although one needs to remain cognisant of the valuations of the underlying companies.
What is your takeaway from the Fed policy meeting, and do you expect the FOMC to go for two rate cuts in the second half of 2025?
The US Fed, as widely expected, left the interest rates unchanged while penciling in an unchanged two rate cuts in their ‘dots plot’ until the end of this year. It acknowledged that economic momentum has softened but remains broadly solid, with a resilient labour market. With the hold, the Fed is sticking to its data-dependent stance and withstanding the political pressure to cut rates.
Given the relaxation of the US tariff tensions, economic uncertainties are seen as having receded, although they remain elevated. Our global desk expects the Fed to wait over the summer months to react to weaker growth, as the tariffs threaten price stability, but then pursue more aggressive rate cuts of 50bps each in September and October, once permitted by weakness of incoming data.
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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