The US Federal Reserve’s recent dovish stance may lead to rate cut in the first quarter of 2024, believes Andrew Holland CEO, Avendus Capital Alternate Strategies. He tells Siddhant Mishra that India’s consumption story will continue to drive earnings upgrades. Excerpts:
How do you see the markets in 2024?
Our view is that the US Federal Reserve (Fed) won’t go too far in terms of rate hikes. Therefore, interest rates will fall and when growth comes back, investors will look at emerging markets. This has played out well.
The Fed’s dovish stance last week was a complete turnaround, signalling that growth is happening at a faster rate. I expect one cut in the first quarter of 2024, which could lead to the Reserve Bank of India (RBI) to follow suit, if food inflation and commodity prices remain low. Interest rates falling globally and a weaker dollar bode well for emerging markets (EMs). In addition, the markets will also factor in what happened in the recent state elections.
If you had a 5% upturn in the market, you’re looking at another 5% between now and the first quarter, which is 22,000-level for the Nifty.
Markets seem to be in overbought territory. Are valuations too stretched?
Valuations are okay, given that we could be looking at an earnings upgrade going into 2024. This is because the multiplier effect of the government’s capex across industries will start playing out. Also, there is no real margin pressure because commodity prices have remained subdued. Higher volumes will boost the bottom line.
Flows are not coming into EMs at the moment because there is a big negative on China. If China fires off, flows will return and especially to China as it is cheap. Others will get flows, but disproportionately less than China.
Where does India stand in terms of ‘China+1’?
I see it as ‘China and India’ and not ‘China plus India’. Consider the demographics of the two countries, which are similar. We have 400-500 million in the millennial/GenZ bracket. We know where the spending power is. Once India gets past $2,500 per capita GDP, people will start spending incrementally beyond the essentials, on ‘experiences’.
When foreign firms are asked where they will get growth from, they say they are looking at India. India has become a services-oriented economy, and technology will help in further transition.
How would you describe India’s consumption story?
Consumption is a great story for India. Just take beverages, and you can see people moving up the value chain as evidenced by the results of retailers — it’s more on the higher end than the lower end. Consumption patterns change once you move up the ladder.
To what extent will US rate cuts benefit export-oriented sectors?
First, it will lead to a weaker dollar, helping EM currencies to appreciate. However, I don’t see India as an exporter. It’s a domestic-driven economy, which is what investors like. Industries like the electronics manufacturing sector will become huge very soon. India alone, as a consumption story, is big enough.
Geopolitical factors have not too encouraging. How do you see the FPI flows being impacted because of that?
Interest rates will be cut because growth needs a booster. When there is growth, investors will look at exporting countries like China and South Korea, while India is among the big domestic economies. When you come to EMs where risk is high, money goes to China as it is a cheap market, but India is promising too, because of its consumption story. The sell-off in September and October was not necessarily and India-specific issue but an EM problem.
What direction will the Indian banking/financials space take?
Results for banks were encouraging, but two questions remain unanswered. First, when will the pressure on net interest margins (NIMs) ease? Every bank was silent on this. Second, banks deny doing much of unsecured loans, but it seems to be happening. NIMs are under pressure, and with the latest regulation likely to hit loan growth, they will have to reduce their forecast.