Taher Badshah, CIO,
Invesco Mutual Fund
About 10 to 12 days back, in an interview, you said Indian markets are vulnerable as valuations are at a meaningful premium to global markets. In the last fortnight or so, whether you look at the US or even in the Indian markets, where levels that we are seeing did not work out that way. What do you make of the market setup and the valuations that we are seeing?
The context that we were trying to communicate is that throughout most part of 2022. We have taken confidence in the fact that India’s domestic economic drivers are reasonably strong and we will stand up reasonably better in this whole global environment in many ways, not just with regards to inflation and interest rates but even with regard to several other issues.
Probably commodity prices are also coming down and incrementally turning favourable for India. The domestic set up for India has been reasonably strong and that has also manifested itself in what the market has rewarded the Indian markets with.
Obviously we worry about everything in the markets and the one thing which clearly at this stage we somewhat worry about is the fact that one, India too has been a beneficiary of the monetary stimulus over the last two years and recovery that we have seen in global economies through the external route so essentially in the form of exports which has done exceedingly well for India in many ways and may sectors in many industries over the last two years so.
In fact, India’s share of exports has actually risen from about 17-18 odd percent to more like 22 odd percent of its GDP. Clearly that has provided us with some tailwind and benefited some of our local growth dynamics. Now as we are coming into a phase where we can argue that the global economies are likely to slow down, the extent of the slowdown is probably debatable but we are going to see some bit of a let off in terms of growth out there.
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If India has benefited in the past, then it also probably stands to lose on that external front and we are already starting to see some bit of that export slowdown come about, imports being relatively stickier, leading to a current account gap which is getting a little wider manifesting in the form of the currency pressures and so on and so forth.
External vulnerability is something that we have to bear in mind because it can have repercussions in terms of our monetary policies domestically. That is where we are and putting this in context with the fact that while India by itself does not necessarily look very expensive at sub-20 one year forward multiples, but in the context of where we are versus the rest of the world, we are at a meaningful premium.
Our premiums have always been there but they have expanded to virtually the highest ever in recent years. So in an overall global environment which is going to see a somewhat elevated interest rate table compared to what it was in the prior three or four years and adjusted for that, valuation can come as a deterrent for very sharp moves of the market from here to sustain.
Tell us about the addition of as well as . You already have a decent exposure to other financials like ICICI, , ?
We have only got a little more constructive and positive on the whole banking space – both the private sector banks and some of the top tier public sector banks as well. To that extent, we are entering into a phase of cyclical strength as far as the banking sector is concerned notwithstanding the fact there could be hurdles with regard to deposit growth and we need to bring about some differentiation from one bank to another, based on cost of funds and strength of liabilities.
But in general, the environment is getting more and more supportive. This has been a favoured sector for us for a long period of time. It did not necessarily do as much in 2021 but is delivering a good number of those levers in the course of this year. This will further strengthen into 2023. As part of the widening of that basket, we have added a few more names.
At what point in time does it look like the outperformance by India will get challenged? If the Fed indicates that the US economy needs no more interest rate hike, could that be the turning point and could the currency be the turning point?
I agree and that is what we are kind of watchful of, we are not super concerned but that is something which at least from a rotational trade perspective or a tactical trade perspective in a global setup can come in India’s way.
It may not necessarily be that India underperforms because of its own set of reasons. It is just that at some stage, if the global markets start looking more attractive, money for a short period of time can always rotate and we have seen that on several occasions.
From a more India intrinsic perspective, what may come in our way if at all, is much more elevated rate structure or interest rate level than we have in our minds, probably being forced upon us by external conditions. But if that were to come to bear, then we will have some challenges with regard to our growth.
As it always happens, some of these things like interest rate hikes and all that does not show up immediately. It shows up with a lag and it can show up in the global markets and it can even show up in India. So long as that equilibrium of India’s growth being ahead and not getting challenged by higher interest rates remains, we are fine but if we come to a situation where interest rates start coming in the way of growth and valuations being where they are and if at around the same time we see global opportunities become more attractive, investors can probably make that switch.