#JPMorgan's Rajiv Batra provides insights into the evolving global economy, addressing the potential consequences of anticipated rate cuts by U.S. #FederalReserve, uncertainties surrounding the #Chinese markets and much more.
Watch him in conversation with Niraj Shah.
Watch him in conversation with Niraj Shah.
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TVTranscript
00:00 [MUSIC PLAYING]
00:03 Thanks for tuning into "Talking Point."
00:10 I'm your host, Neeraj Shah.
00:11 Our guest today is Rajiv Batra, head of AsiaX Japan and China
00:16 Equity Strategist at JP Morgan.
00:18 Rajiv, welcome to the show.
00:20 Thanks for taking the time out to "Hope All Is Well."
00:22 Just wondering, what are your thoughts
00:24 around what the world markets do in a year which
00:27 is fraught with election risk as well as election calendar
00:34 and the geopolitical risk being as heavy as they are?
00:38 As you rightly pointed out, 2024 is a record-breaking year
00:42 for elections, with elections taking place in 77 countries,
00:46 although the US elections are arguably
00:50 the one race which will going to have
00:52 a broad global consequences.
00:55 But that's where we will need help
00:58 of navigating the equity markets, particularly
01:01 the high beta Asia or emerging market equities.
01:05 In that, the idea should be trade rather than invest
01:09 and go through with earning cycle,
01:12 because the P-relating phenomena or valuation-relating phenomena
01:16 will be largely dependent on the monetary policymaker.
01:19 If we see any kind of a rate cuts and easing,
01:22 then valuation will come into play.
01:24 If not, then earnings will be buy-all, end-all for market
01:28 to track, and that will be driving the performance
01:31 from year on.
01:32 But that said, there will be cycles within the cycle
01:36 that will play out, like domestic cycles could
01:39 be divergent from what is happening globally,
01:42 and particularly in the domestic markets like India,
01:46 where they are having a long-term growth prospect
01:49 in play, structural areas are working.
01:52 So that will help them do well in this kind of, you can say,
01:57 a very complicated year or an environment
02:00 to outperform the emerging market equity.
02:02 What's your sense about what the Fed or central banks at large
02:13 could do?
02:14 The beliefs have been very, very disparate.
02:17 And post the Fed comments, as well as the comments
02:21 from some of the FOMC members in the last three or four sessions,
02:25 the view around when the rate cuts start
02:28 are very, very different.
02:30 What's your base case?
02:32 And when do you think the market starts discounting that?
02:36 13th December last year, Fed took a pivot
02:40 by saying they will need to relook the policy stance.
02:44 And within the dot plot, it was revealed
02:46 that we may witness three rate cuts this year.
02:50 So bond market or equity market pricing shifted quite rapidly.
02:55 And at one point of time, start of this year,
02:57 market was pricing in close to seven rate cuts this year.
03:01 Now, looking at the inflation data, which is slowly, steadily
03:05 making a comeback, robust economic growth
03:08 trend in the US, and still a broad-based gain
03:10 in employment, Fed is going to take some time
03:15 to go for either a rate cut or say we are totally
03:20 done with this cycle.
03:22 Premised on that, JP Morgan economic team
03:25 is forecasting the rate cut starting from June this year.
03:28 And we are forecasting five rate cuts, one in June
03:32 and then four in the second half.
03:35 Once Fed starts cutting, that will open door
03:38 for Asia, emerging market, even India,
03:42 to relook at their monetary policy situation.
03:45 But before Fed do anything, can emerging market
03:50 or any other Asian countries react and go before Fed?
03:53 Chances look pretty low.
03:56 OK, yeah.
03:57 And to an extent, the Reserve Bank of India
03:59 in the policy meeting earlier kind of highlighted
04:02 to that effect as well, that the eyes on the globe--
04:07 and of course, they also mentioned about the global debt
04:09 sustainability, but it seemed in some fashion
04:12 that global central banking would probably
04:16 drive risk assets.
04:17 Just one perspective.
04:20 I read in your note very interestingly
04:21 because I was looking at Asia notes more closely
04:25 by virtue of our viewers being such a large dominant Indian
04:29 population, which is that you mentioned
04:32 that you might be partly constructive on China.
04:36 Please correct me if I'm wrong.
04:38 My question would be, there seems
04:40 to be a view that the foreign preempting, when
04:43 is the foreign selling in China going to end,
04:47 has been a rather tough job, and therefore best not to do so.
04:52 How do you think about that aspect?
04:55 You're talking about China beyond geopolitics.
04:59 Investors are searching for answers
05:01 regarding when the physical property markets may settle,
05:05 when business and consumer confidence may recover,
05:08 and how policymakers will resolve local government
05:13 leverage, banking, NPS, and financial tail risk.
05:17 Hence, investors have approached China equities
05:20 more technically based on event-driven catalyst
05:24 and extreme position or valuation.
05:28 Now, when we look at MSCI China, it
05:31 is now trading below to close to our 2024 bear case target
05:36 and clearly in the buying zone.
05:38 The relative performance gap, if you look China
05:41 versus the rest of Asia, it is currently at extreme wide.
05:45 Even within China, the A share, S share premium
05:48 are at a record high level.
05:50 Hence, we believe a sharp reversal
05:52 could occur if market support measure materializes.
05:56 And this is driving our technical overweight
05:59 recommendation on China.
06:02 So again, I mean, it kind of coincides with the other view
06:06 that you put out that unless you mentioned
06:09 that Asia-Pacific returns will be front-ended in 2024.
06:13 So is there a correlation out there
06:15 that China, because it's trading at the valuations that it is,
06:20 sees some bounce, naturally so, and that
06:23 leads to Asia-Pacific markets at large seeing an uptick?
06:27 Part two of my question, can Indian markets,
06:29 which from an optical perspective are expensive,
06:33 or actually from an actual perspective are expensive
06:36 on the NIFTY, can they participate
06:38 in this front-ended uptick for Asia-Pacific in 2024?
06:45 Last September, we argued that Asian equities were troughing
06:48 and would soon see upside.
06:50 And we expected AMEX AFJ, that is MSCI Asia X Japan index,
06:55 to reach 660 by January of this year.
06:59 So MSCI Asia X Japan surpassed 640 levels by the year end,
07:05 and it was up from lows of 580 during last October.
07:10 Now, with this benign US setup, markets
07:12 are likely to keep trading higher
07:15 and may absorb any minor risk even.
07:18 In this context, there are a lot of laggards in Asia equity
07:23 space that may start to catch up in this scenario.
07:26 Now, there are many signs that this
07:28 has been happening since last week of December,
07:32 like price action in Asia is broadening out,
07:35 but it isn't yet extremely elevated.
07:38 The momentum factor has started to underperform
07:41 and also looks quite crowded.
07:43 Now, when we look by market level,
07:45 the most prominent laggards are still
07:47 China, Hong Kong, and Thailand.
07:50 So they are yet to catch up and yet to discount
07:53 the Goldilocks scenario, which other equities are
07:56 discounting globally.
07:58 In case of India, I will say that right now,
08:02 the stronger growth trajectory in India
08:06 is help justifying their higher valuation for the country,
08:10 which is a big question mark most of the investors
08:12 are putting.
08:13 And remember, India is one such market
08:16 which has consistently outperformed emerging markets
08:20 for the last two decades.
08:22 And the reason behind is very simple.
08:24 Growth is a scarce commodity globally,
08:27 and particularly in today's environment.
08:29 And foreign investors do take into account
08:32 relative growth, that is your growth versus a few years
08:36 over there, not just the valuation only to take a call.
08:40 And most importantly, foreign investors are growth tourists.
08:44 They invest in the destinations that
08:46 offer them premium growth compared to either developed
08:49 market or other regions.
08:51 India is offering that growth endlessly year after year.
08:56 And they are deserving this premium and valuation.
08:59 So we do expect there will be a period where markets trade
09:03 sideline because of lack of catalyst.
09:06 But it will be a kind of a small blip
09:09 because there are long-term trend emerging where
09:12 investor interests are rising.
09:14 There's a virtuous cycle of deepening and broadening
09:17 liquidity.
09:19 There is rising fundamental coverages and analysis
09:21 along with the capital issuance.
09:23 And most importantly, India is one such market
09:26 where we are seeing long-only investor have the highest
09:30 breadth of benchmark holding.
09:33 That is the stock's name beyond large cap indices.
09:37 Rajiv, then one question before we hit that break.
09:41 Has, by virtue of people that you may have spoken to
09:46 on the global side who are investing into India
09:48 or looking to invest into India, whether passively or actively,
09:52 has the budget math and the budget statements,
09:57 the fact that fiscal discipline has not only been maintained
10:01 but surprised positively, and we have a Reserve Bank of India
10:06 which is being fairly prudent on almost all things
10:13 that it has done in the last 12, 18 months,
10:15 has there been a change in the tone of investors
10:20 who might be thinking about India?
10:22 There is also this very high probability of policy
10:26 continuity in India as well, right, for the next five years
10:29 in a busy election calendar.
10:31 Do all of these things become a heady cocktail
10:34 for investors who want to allocate to India,
10:36 thinking of, OK, let me go and allocate more,
10:39 or people who have not looked at India thus far saying that,
10:41 it's a large market and there are these factors.
10:44 Let's look at it.
10:47 This plays a very important role,
10:49 and particularly for the long-only investors
10:52 or investors with a horizon of five to 10 years, pensions,
10:57 insurance, retirement funds, who look into allocations
11:01 based on the long-term decision-making of the country
11:04 and policy framing.
11:05 That's where the fiscal prudent approach
11:08 from a government in budget and literally revealing out
11:13 the plan for not just six months or one year, but a five year,
11:17 that we are going to stay prudent on the fiscal terms.
11:20 We are going to look at a long-term growth trajectory
11:23 through CapEx, not just near-term stimuluses only.
11:26 And then RBI, which is helping country to move out
11:30 from a twin balance sheet stress to a twin balance sheet
11:34 advantage when we look at the asset qualities or even
11:39 the NPL cycle.
11:40 So that is what helping India's narrative, particularly
11:44 in terms of valuation.
11:45 I'm sure you would have seen that the risk
11:48 premia in India for the last 10 years
11:50 or under the current government regime
11:53 have declined substantially.
11:54 At one point of time, the risk premia
11:56 was close to 4.5%, 4.8% based on calculations back in 2010.
12:02 It came down almost to 1%, 1.1% by 2021.
12:06 That is all led by this effort taken
12:09 by central bank and the government
12:11 and getting a lot of traction from the foreign investor.
12:16 So not only it benefits India in form
12:19 of a sustainable and a quality growth,
12:22 but also decline in risk premia or a premium at that level,
12:27 what developed market like the US is enjoying.
12:30 Rajiv, you told us about how some of the measures that
12:34 have happened on the fiscal side, on the monetary side,
12:37 maybe even policy continuity and policymaking
12:40 is important for global investors
12:43 when they consider either investing
12:45 in a country or in an economy or deepening the investments
12:49 in the economy.
12:49 I was wanting to ask you, have you
12:51 heard a change in the tone as well post the budget
12:55 specifically, wherein the deficit has been forecasted
12:59 at 5.1% as opposed to the earlier beliefs
13:02 and beat the glide path target of 4.5%.
13:06 Has it been a dominant conversation, if you will,
13:10 in conversations that you may have had post-first Feb,
13:13 or is it early days as yet?
13:16 So anecdotally, talking to most of my investors,
13:18 they all give thumbs up to this budget
13:20 because this actually has the potential of increasing
13:25 India's long-term GDP growth, which people were thinking
13:30 in the range of 6%, 6.5%.
13:32 Now they are even contemplating and asking,
13:34 are we moving towards the range of 7.5%, 8%,
13:39 and the comparison is being drawn from 2000 to 2003 period,
13:44 where India was going through a deleveraging cycle
13:47 prior to 2003.
13:49 Asset quality or slippage ratios were getting better,
13:52 and then we saw a compounded annual of 8% real GDP growth.
13:57 So that's what investors are now discussing and talking
14:01 after this kind of a budget which was delivered,
14:04 where the focus is not just on fiscal consolidation,
14:07 taking towards the glide path of 4.5% fiscal deficit,
14:11 but also maintaining the capex growth.
14:15 Now, critics will say that the capex growth is slowing down
14:20 from 28%, 30% measure to 16%, 17%,
14:24 but we need to recognize the base have changed.
14:28 That 30% or 28% growth was happening from a very low base.
14:31 Now with this high base, even the high teens
14:34 kind of a capex growth means this
14:36 will open up the avenue of a higher potential growth
14:39 for the country in coming five years time.
14:42 So that is what is exciting my long-term investors
14:45 or long-only, but for the short-term traders or people
14:49 who invest on a very short horizon, one month or a two
14:53 month basis, they are not seeing the immediate growth catalyst.
14:57 So they were like 50-50 on the budget,
15:01 but majority of it was a thumbs up.
15:04 OK.
15:06 From a valuation perspective as well,
15:09 which is the most spoken about point for India,
15:11 but I think you mentioned that it's kind of been
15:13 at a premium for a while.
15:14 But it currently, from an FII perspective,
15:16 Rajiv, seems to be a tale of two halves, right?
15:19 Because traditionally, the sectors that FIIs have usually
15:23 preferred, which is banking and IT, largest weightage,
15:27 largest FII overweight, are actually trading cheap.
15:31 So in some sense, while you're buying into an expensive market,
15:34 you're probably going in for teams
15:36 which are not that expensive.
15:39 So how does that work?
15:40 And what is your advice, therefore,
15:42 to clients when they're talking about allocations to India?
15:45 Most importantly over here, if you look at valuation,
15:49 large cap relative to mid cap or large cap relative to small cap
15:54 are trading cheaper in a relative valuation term
15:57 because they have not fully participated this rally.
16:01 Even in case of a large cap index,
16:03 as you clearly pointed out, majority of the heavy weights,
16:06 particularly in the banking space,
16:09 have not joined the rally.
16:10 And besides that, even in the consumption side
16:12 or the consumer name side, there are a lot of names
16:15 who are yet to participate.
16:16 So in case if we move out the stocks and few sectors which
16:21 have rallied quite a lot based on the team being played out
16:25 domestically or externally, then there
16:28 are certain pockets which are trading cheaper.
16:31 From our perspective, we are maintaining overweight
16:35 on banking sectors or financial sector
16:37 where we believe they are yet to participate in this growth
16:42 rally which is happening.
16:43 And sooner rather than later, they will join the bandwagon.
16:46 And it is a part of our team where
16:49 legards will join this Goldilocks scenario
16:52 as we progress through the year.
16:54 Besides that, selective consumer names and even IT names,
16:59 heavyweight large cap IT names may also do well.
17:03 It's interesting you have that view.
17:04 I'm just trying to understand.
17:06 Commentary from IT companies-- or actually,
17:10 we are looking at this commentary from,
17:12 let's say, Cognizant, where the CEO is saying that we don't
17:16 know what we don't know.
17:17 And the conversation around discretionary spending
17:20 is not quite clear.
17:21 So in some sense, is it a bit of a preempting
17:24 that at some point of time, the US economy will
17:26 stabilize in the calendar and spends
17:27 will begin discretionary spends?
17:29 And therefore, these stocks will start seeing some uptake
17:32 because they discount six months, nine months in advance?
17:35 What's the rationale behind IT services at large,
17:39 be it India or some of the other businesses existing
17:43 worldwide or in Asia?
17:47 The narrative has changed.
17:49 If you remember, at one point of time,
17:52 market was discounting a hard lending scenario almost
17:56 up till mid of last year.
17:58 Then the narrative shifted towards a higher for longer
18:02 when your 10-year in US moved from 3.3% to almost 5% level.
18:07 Recently, the narrative shifted again
18:09 and started pricing in a soft lending or a Goldilocks
18:12 scenario.
18:13 But it needs to take into account
18:15 that even if we are not encountering a recession
18:18 in the near term, if you look at economist forecasts,
18:22 GDP growth globally, as well as in US,
18:24 is expected to slow down from above potential number
18:28 of last year.
18:29 Now, when your GDP will slow in the key customer market that
18:33 is in US, your top lines may get impacted due to that.
18:38 And this is the reason why it is kind of a conundrum, which
18:42 either corporates or even clients and even
18:44 we are on the sell side are navigating,
18:47 as we said at the start of this interview,
18:50 that we don't know how the year will pan out.
18:53 Are we actually heading towards a full soft lending
18:56 or somewhere or other even the accident recession can happen?
19:01 But base case wise, we are sticking with a soft lending
19:05 kind of a call.
19:06 But to be very frank, it's need of monitoring
19:11 on a monthly basis rather than taking
19:14 a call what will happen six months or 12 months
19:16 down the line.
19:18 And Rajiv, it might have some bearing on exporting economies
19:24 or exporting companies from countries like India
19:26 as well meaningfully as to what the US and maybe
19:29 even the European economy does.
19:30 So what's the view there?
19:32 I mean, I know you mentioned that you need to monitor it
19:34 on a monthly basis.
19:35 But if you were to--
19:36 I mean, if I were to put a gun to your head
19:38 and ask you that give me a view about what
19:40 could happen to exporting economies for 2024,
19:44 what would your best guess be?
19:47 In our report, we have clearly mentioned
19:50 that we prefer domestic over export.
19:54 And the reason behind is very simple
19:58 because we do expect slowdown happening globally.
20:01 Now, when we look at investor positioning,
20:03 they are already significantly overpositioned
20:06 in the tech trades, particularly in Korean tech, in Taiwan tech.
20:11 Now, when you look at the revenue exposure of Asia
20:15 countries and sectors, Korea, Taiwan, Australia,
20:20 and some part of India are exposed
20:22 towards global markets, that is particularly US and Europe.
20:25 That pockets are vulnerable.
20:28 And they are more vulnerable if investors are already
20:30 positioned because during the slowdown time,
20:33 they will sell what they own.
20:35 And if they are owning this kind of a high revenue exposure
20:38 places, that's where the maximum downside would be.
20:41 Now, compared to Taiwan and Korea IT,
20:46 India IT, which is on the services side,
20:49 is not that heavily exposed or overweighed
20:52 by the global investor at this juncture.
20:55 No doubt, recently, they have reduced their underweights
20:58 on Indian IT space and have gone to a marginal underweight
21:02 to a neutral kind of a position.
21:04 So they may not be as vulnerable,
21:06 I would say, the Taiwan or the Korea underweight.
21:10 In terms of our allocation, we are holding neutral on Korea
21:14 and we are underweight on Taiwan,
21:16 worrying about this export slowdown or a global slowdown
21:19 risk.
21:20 Got it.
21:20 And my final question, Rajiv, and that
21:22 is since you mentioned that focusing on domestic,
21:26 there is a thought and there's a bit of a dichotomy, firstly,
21:31 that the last five years, Indian public sector
21:34 lenders have done way better than the private sector
21:36 lenders.
21:37 Part of it could well be because FIs
21:39 have sold consistently through the last 18 months
21:42 and they're the largest overweight
21:43 or the largest weightage.
21:45 But the question is, there is a belief
21:47 or there is a thought coming that by virtue of the fact
21:49 that the Indian corporate is so deleveraged
21:52 that if a CapEx drive comes to the fore,
21:55 the CapEx growth may far outstrip credit growth
21:58 of the private sector lenders as well.
22:01 And therefore, the growth rates in private sector banks
22:06 may not be as strong as people may think of when
22:10 they think of a scenario similar to 2003 to 2008.
22:13 So my question-- sorry, a long question, but my question is,
22:16 do you think these valuations are good enough for investors
22:19 to put into private sector banks in India,
22:21 or are there better pockets out there in India?
22:25 Definitely, private sector banks will come also into the play
22:28 because the corporates are not just your large cap only.
22:32 There will be entire supply chain along with them
22:34 who will try to grow.
22:36 So based on the tiering and lending
22:38 and also on the positionings on their asset side or the cash
22:43 side will help them navigate.
22:45 So in case if the large cap corporates are cash rich
22:48 and they may not want to tap into banks for the credit
22:51 growth or the borrowing requirement,
22:53 but along with them, the suppliers
22:56 or the various other part of mid-cap or the companies
23:00 and small cap who are along with them,
23:02 maybe their credit ratings are not that great enough
23:05 to directly tap, or maybe they do not
23:07 have that high cash level.
23:09 So they will still have a borrowing requirement and need.
23:12 So rather than just focusing on few cash rich
23:15 corporate who can drive the private capex cycle only,
23:18 we have to look into the broader sleeves
23:20 over there who will also grow along with them,
23:22 and they will have borrowing need.
23:24 And this will be the audience who
23:26 will be tapping into your private banks
23:29 and can generate growth higher.
23:31 Now, here, the expectations are being so low over here
23:35 that even a small bit of a change
23:38 can lead to a big delta coming through on the credit growth
23:42 side, like if the numbers come through.
23:45 So that keeps us still positive on the private bank space.
23:49 Got it.
23:50 OK.
23:51 Well, on that note, Rajiv, such a pleasure talking to you.
23:53 Thank you for taking the time out and speaking to us
23:55 and giving us your overarching view.
23:57 Really appreciate your time.
23:58 Thank you, Neeraj.
23:59 And viewers, that's JP Morgan saying
24:01 that maybe gains could be front-ended in calendar year
24:04 '24 for Asia, and India could well participate
24:09 despite the valuations.
24:10 By the way, just before we wrap up the show,
24:12 he's saying that if indeed certain conditions happen,
24:14 which is the Reserve Bank of India does a few things
24:18 and there is policy continuity, then
24:21 the Nifty may even trade in the expensive zone of $22,000
24:24 to $25,000 in the current calendar.
24:26 So bear that in mind.
24:27 Thanks so much for tuning in, viewers, to this show.
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