Daily Voice | This research head sees global funds rushing in for Indian equities in 2023

No. For that pool of money, there will be rotation from outperformers like India into the very depressed North Asian markets of Korea and Taiwan next year. They are highly cyclical markets, with big electronics weightings, but they have already priced in a US recession.

For the records, we put the odds of a US recession at 40 percent. So, if one does happen, they are fairly priced. If it doesn't, they are mispriced.

Although global funds (developed and emerging markets together) are another pool of money entirely, which is much larger. Those should allocate more to India next year.

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Have you seen any kind of significant evidence that indicates US recession is coming?

In the real economy, most indicators do not suggest a recession, although some do. For example the NAHB’s Housing Market Index and Traffic of Prospective Buyers Index are at levels in the past which coincided with recessions.

In the financial markets, there are also some signs that are suggestive of a recession. For example, 75 percent of treasury yield curves are now inverted. In the past, when 55 percent became inverted, that was a sign a recession was coming.

Have you seen the major valuation gap between India and China?

Yes, and it is as extreme as it has ever been. However, India has solid structural growth. China does not, due to its ageing demographic, a weak property sector, an increasingly heavy government hand. Even private companies won’t want to show a lot of profits, for fear they will become targets of the government. So the valuation gap is justified.

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How do you see 2023 for Indian equities? Do you see Sensex beyond 65,000 by March 2023?

I think 2023 will be a good year. With the dollar peaking, and the chances of a US recession not low, global funds will want to allocate more to emerging markets. India should be at the top of their list. Even if they don’t buy, domestic investors will, and they alone are significant enough move the market higher.

With the easing inflation concerns, do you think Federal Reserve will take a pause after two more interest rate hikes?

Yes. We look for a 50 basis point hike at the Fed’s next meeting on December 15. It won't announce a pause at that meeting, but it will release an update "dot plot" (rate forecast), and that will likely be lower than the last dot plot in September. Then, we think by January, the inflation data will be sufficient to allow for a pause. We look for a cut some time in the second quarter.

How do you see the existing geopolitical crisis to affect the markets?

The meeting between China’s President Xi Jinping and US President Joe Biden in Bali last week was unexpectedly long and cordial. The temperature of geo-politics is still hot, but not as hot as before. Perhaps more interesting is the fact that Berkshire Hathaway announced it has invested more than $4 billion into Taiwan Semiconductor.

Berkshire rarely makes overseas investments, and rarely invests in technology. It is a good investor, not only because of its stock picking acumen, but because it has good contacts in government. Its government contacts probably told it they assess the chance of a war to be low.

Which are those sectors where you have a bullish view in India?

Banks have been our preferred sector for some time. The story is simple: they are a proxy for economic growth, which we see as being robust over the next few years. And they are in a position to lend, having written off most of their legacy NPAs (non-performing assets).

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