JPMorgan's Rajiv Batra Forecasts Five Rate Cuts By U.S. Fed, Starting From June
India is a good place for long-only investors or investors with a five to 10-year horizon, he says.
The U.S. Federal Reserve may take time to start with rate cuts, the first of which can be expected by June, according to Rajiv Batra, Asia equity strategist at JPMorgan Chase & Co.
As many as five rate cuts have been forecasted by the JPMorgan team. Once they are implemented by the Fed, a re-evaluation of monetary policies in Asia and other emerging markets will be facilitated, Batra told NDTV Profit.
(Source: Rajiv Batra/LinkedIn)
Where Does India Stand?
Batra said the country is currently experiencing a robust growth trajectory, which contributes to justifying the high valuations. "India is one such market that has consistently outperformed emerging markets for the last two decades," he said.
Foreign investors—often characterised as "growth tourists"—tend to invest in destinations that provide premium growth as compared with either developed markets or other regions, according to him. India continues to offer substantial growth year after year, making it an attractive prospect for such investors, Batra said.
India is a very good place for long-only investors or investors with a five to 10-year horizon, he said. "We do expect there will be periods in the market that will trade sideways due to a lack of catalysts, but it will be like a small blip because long-term trends are emerging where investors are rising."
Batra said the interim Union budget has the potential to increase India's long-term growth of gross domestic product. The focus is not just on fiscal consolidation, but also on maintaining the growth in capital expenditure, he said.
Global View
Most prominent market laggards are China, Hong Kong and Thailand, Batra said.
In terms of China, he said that investors are seeking answers to when physical markets would stabilise, and business and consumer confidence would recover.
Watch The Full Interview Here:
Edited excerpts from the interview:
What are your thoughts on the world markets, which face election risk, geopolitical calendar, and the geopolitical risks?
Rajiv Batra: You have rightly pointed out. The year 2024 is a record-breaking year, with elections taking place in 77 countries. The U.S. elections are arguably the one race, which will have broad global consequences. But that's where we will need help navigating the equity markets, particularly the high beta Asia or emerging market equities in that the idea should be trade rather than invest and go through with earnings cycle because the PE–rerating phenomenon or valuation relating phenomenon will be largely dependent on the monetary policy maker.
Even if we see any kind of rate cuts, valuation will come into play. If not, then earnings will be (the) by all and that will be driving the performance from here on. But that said, there will be cycles within cycles that will play out—like domestic cycles could be divergent from what is happening globally and particularly in the domestic market like India, where long-term growth perspectives are at play and structured areas are working. So that will help them do well in this kind of a very complicated year on an environment to outperform the emerging market equities.
What will the Fed or central banks do? What's your base case and when do you think the market starts discounting that?
Rajiv Batra: On Dec. 13 last year, the Fed took a pivot by saying they will need to relook the policy stance and within the dot plot report revealed that we may witness three rate cuts this year. So bond market or equity market pricing shifted quite rapidly and at one point of time, at the start of this year, the market was pricing in close to seven rate cuts this year.
Now, looking at the inflation data, which is slowly (and) steadily making a comeback, robust economic growth pains in the U.S. and still a broad base gain in employment, the Fed is going to take some time to go for either a rate cut or say we are totally done with the cycle. Remember that the JP Morgan economic team is forecasting the rate cut starting from June this year and we are forecasting five rate cuts—one in June and then four in the second half. Once the Fed starts cutting, that will open the door for Asia, emerging markets, and even India, to relook at their monetary policy situation. But before the Fed does anything, can emerging markets or any other Asian countries react and go before the Fed's? The chances of those look pretty low.
There seems to be a view that the foreign pre-empting—when the foreign selling in China is going to end—has been a rather tough job. And therefore, it is best not to do so. What do you think about that aspect?
Rajiv Batra: You are talking about China beyond geopolitics. Investors are searching for answers regarding when the physical property markets may settle, when business and consumer confidence may recover, and how policymakers will resolve local government leverage… And investors have approached China equities, more technically, based on event-driven catalysts and extreme position or valuation.
Now, when we look at MSCI, China is trading below and too close to our 2024 bear case target. If you look at China versus the rest of Asia, it is currently at an extreme point. Even within China, the share premiums are at a record high level and we believe a sharp reversal could occur if markets support major materialisations. And this is driving our tactical overweight recommendation on China.
Is there a correlation out there that China, because it's trading at the valuations that it is seeing (will see) some bounce naturally and that leads to the Asia Pacific market at large seeing an uptick? Are Indian markets expensive from an optical perspective or are they expensive an actual perspective on the Nifty? Can they participate in this front-end uptick for Asia Pacific in 2024?
Rajiv Batra: Last September, we argued that Asian equities were dropping and would soon see the upside... MSCI Asia X Japan surpassed 640 levels by the year end, and it was up from lows of 580 last October. Now, with this benign U.S. setup, markets are likely to keep trading higher and may absorb any minor risk event. In this context, there are a lot of laggards in the Asia equity space that may start to catch up in the scenario.
Now, there are many signs that it had been happening since last week or December, like price action in Asia is broadening out but it isn't yet extremely elevated. The momentum factor has started to underperform and also looks quite crowded. So when we look at the market's level, the most prominent lagardes are still China, Hong Kong and Thailand. They are yet to catch up and discount the Goldilocks scenario which other equities are discounting globally.
In the case of India, I will say that right now, the stronger growth trajectory in India is helping justify their higher valuation for the country, which is a big question mark most of the investors are putting. Remember, India is one such market which has consistently outperformed emerging markets for the last two decades. The reason is very simple. Growth is a scarce commodity globally, and particularly in today's environment, foreign investors do take into account relative growth. That is your growth versus the peers over there, not just the valuation to take a call and most importantly, foreign investors are growth tourists. They invest in the destinations that offer them premium growth compared to either developed market or other regions. India is offering that growth and literally year after year and we are deserving this premium and valuation.
So we do expect a period where markets stay sidelined because of lack of catalysts, but it will be a kind of a small blip, because there are long-term trends emerging where investor interest is rising. There's a virtuous cycle of deepening and broadening liquidity. There is rising fundamental coverage and analysis along with the capital issuance and most importantly, India is one such market where we are seeing long-only investors have the highest bets of benchmark holding...
Has the budget math, the budget statements, a positive fiscal discipline, and the Reserve Bank of India's prudence helped? There is also a very high probability of policy continuation in India for the next five years. Has there been a change in the tone of investors who might be thinking about India?
Rajiv Batra: This plays a very important role, and particularly for the lowly investors or investors with a horizon of 5-10 years—pension and insurance retirement funds, who look into allocation based on the long-term decision making of the country and policy framing.
The fiscal prudent approach from the government in the budget and literally revealing out the plan for not just six months or one year but five years that we are going to stay prudent on the fiscal term, we are going to look at a long-term growth trajectory through capex not just near-term stimulus and then RBI, which is helping the country to move out from a twin balance sheet scare towards twin balance sheet advantage, when we look at the asset quality or even the NPL cycle— all are helping India's narrative, particularly in terms of valuation.
I am sure, you would have seen that the risk premia in India for the last 10 years or under the current government regimes have declined substantially. At one point of time, the risk premia were close to 4.5-4.8%, based on calculation back in 2010. It came down almost to 1-1.1% by 2021. That is all led by these efforts taken by the central bank and the government and getting a lot of traction from the foreign investor.
So not only does it benefit India in the form of sustainable and quality growth, but also declines into risk premia or a premium at that level, which developed markets like the U.S. enjoy.
Rajiv, you told us about how some of the measures that have happened on the fiscal side, on the monetary side, maybe even policy continuity. And policymaking is important for global investors when they consider either investing in a country or in an economy or deepening the investments.
Have you heard a change in the tone as well, post the budget specifically? We're in the fifth. Deficit has been forecast at 5.1%. Has it been a dominant conversation post Feb. 1 or is it early days as yet?
Rajiv Batra: Anecdotally, while talking to most of my investors gave a thumbs-up to this budget because they actually had the potential of increasing India's long-term GDP growth, which people were thinking about in a range of 6-6.5%.
Now, they are even contemplating and asking are we, moving towards the range of 7.5-8%. And the comparison that is being drawn if from the 2000-03 period. India was going through a deleveraging cycle prior to 2003, asset quality or slippage ratios were getting better and then we saw a compounded annual of 8% real GDP growth.
So that's what investors are now discussing and talking about after this kind of budget which was delivered with the focus not just on fiscal consolidation, but also towards the right path of 4.5% fiscal deficit, at the same maintaining the capex growth.
Now, critics will say that the capex growth is slowing down from 28-30% measured to 16-17%. But we need to recognize the base has changed from 30% to 28% growth, which was happening from a very low base.
Now with this higher base, even a high-teen kind of a capex growth means this will open up the avenue of a higher potential growth for the country in the coming five years. So that is what is exciting for my long-term investors normally. But short-term traders, or people who invest on a very short horizon one-month or two-month basis, are not seeing the immediate growth catalyst. They were like 50-50 on the budget, but the majority of them got the thumbs up.
From a valuation perspective, which is the most spoken about point for India? Traditionally, the sectors that FIIs have usually preferred—banking and IT—are actually trading cheap. Are you going in for themes, which are not that expensive? How does that work and what is your advice to clients when they are talking about allocations to India?
Rajiv Batra: Most importantly, over here, if you look at valuation, large caps relative to mid caps, or large caps relative to small caps, are trading cheaper in a relative valuation term because they have not fully participated in this rally.
Even in the case of a large-cap index, as you clearly pointed out, the majority of the heavyweights, particularly in the banking space, have not joined the rally. Besides that, even on the consumption side, there are a lot of names who are yet to participate. So if we move out of the stocks and few sectors, which have rallied quite a lot, based on the theme being played out domestically or externally, then there are certain pockets which are trading cheaper.
From our perspective, we are maintaining an overweight on the banking sector or financial sector where we believe they are yet to participate in this growth rally, which is happening and sooner rather than later they will join the bandwagon. And, it is part of a theme where laggards will join this Goldilocks scenario as we progress through the year. Besides that, selective consumer names and even I.T. names, heavyweight I.T., large cap I.T. names may also do well.
While looking at the Cognizant CEO's commentary, the conversation around discretionary spending is not quite clear. So in some sense, is it a bit of a pre-empting that at some point of time, the U.S. economy will stabilize in the calendar and spends will begin, discretionary spends and therefore these stocks will start seeing some uptick because they discount six months nine months in advance?
What's the rationale behind I.T. services at large, be it India or or some of the other businesses existing worldwide, whether here in Asia?
Rajiv Batra: The narrative has changed. If you remember at one point of time, the market was discounting a hard landing scenario,almost up till mid of last year. Then the narrative shifted towards a higher for longer when your tenure in the U.S. moved from 3.3% to almost 5% level.
Recently, the narrative shifted again and started writing in a soft landing or a Goldilocks scenario, but it needs to take into account that even if we are not encountering a recession in the near term, if we look at the economic forecast, GDP growth globally, as well as in the U.S. is expected to slow down from the above potential number of last year.
When your GDP will slow in the key customer market—in the U.S.—your top lines may get impacted due to that. And this is the reason why it is kind of a conundrum which either corporates or even clients and even we on the tech side are navigating. As we have said in the start of this interview that we don't know how the year will pan out. Are we actually heading towards a full soft landing or somewhere or that even an accident recession can happen. But the base case wise, we have taken a soft landing kind of a call. But to be very frank, it needs monitoring on a monthly basis, rather than taking a call about what will happen six months or 12 months down the line.
It might have some bearing on exporting economies or exporting companies from countries like India as well meaningfully as to what the U.S. and maybe even the European economy does. So what's the view there? What would your best guess be?
Rajiv Batra: In our report outlook, we have clearly mentioned that we prefer domestic over export and the reason behind it is very simple, because we do expect a slowdown happening globally. Now, when we look at investor positioning, they are already significantly over positioned in the tech trade—particularly in the Korean tech and Taiwan tech.
Now,when you look at the revenue exposure of Asia, countries and sectors, Korea, Taiwan, Australia and some parts of India are exposed towards global markets—particularly US and Europe. Those pockets are vulnerable and they are more vulnerable if investors are already positioned, because during the slowdown they will sell what they own and if they are owning this kind of a high revenue exposure places that's where the maximum downside would be.
Now, compared to Taiwan and Korean I.T, India I.T. is not that heavily exposed or overweight by the global investors at this juncture. No doubt, recently they have reduced their underweights on the Indian I.T. space and gone from a marginal underweight to a neutral kind of a position.
So they may not be as vulnerable as I will say Taiwan or Korea are. In terms of our allocation, we are holding neutral on Korea and are underweight on Taiwan, worrying about this export slowdown or a global slowdown.
In the last five years, Indian public sector lenders have done way better than the private sector lenders. Do you think the current valuations are good enough for investors to put into private sector banks in India, or are there better pockets out there in India?
Rajiv Batra: Definitely. Private sector banks will also come into the play because the corporates are not just large caps. There will be an entire supply chain along with them who will try to grow. In case the large-cap corporates are cash rich and do not want to tap into banks for credit growth or the borrowing requirement, but mid-cap and small cap companies will have borrowing requirement.
May be their credit ratings are not that great enough to directly tap or may be they do not have that higher cash level. They will still have a borrowing requirement and need.
They will be tapping into private banks and generate higher growth. Now your expectations are being so low over here that even a small bit of a change can lead to a big delta like coming through on the credit growth side... So that keeps us still positive on the private banks space.
