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00:00We are live from the J.P. Morgan India Investor Summit, and we are in conversation with Luis
00:11Organes, Head of Global Macro Research on all things macro, and particularly emanating
00:18from the West and impacting the East, EMs and India.
00:22Luis, so good talking to you.
00:23Thank you for taking the time out.
00:24Thank you for having me here.
00:25The pleasure is entirely ours.
00:28Well, you spent about four or five hours in the conference already, I presume.
00:32What has been the top of mind for investors who are seeking your opinion?
00:36Is it the central banking action?
00:39Is it valuations?
00:40Is it the upcoming elections in the U.S.?
00:43What stands out top of mind?
00:45It is interesting that India has all of a sudden become a center of gravity within EM.
00:49And not only EM, I mean, globally, when people look at, okay, what is the next frontier in
00:54terms of opportunities, medium, long-term opportunities, India is topping the charts
00:59these days.
01:00I was in New York two weeks ago.
01:01We had this global macro conference, and we did ask in a survey to investors, with like
01:05300 people in the room, you know, what is the country within EM where you see the most
01:09promise and that it cannot perform over the next coming years, and India was topping the
01:14charts, you know.
01:15And these are people that are investing both in fixed income and in equities, but also
01:18in the real economy.
01:20So I think a lot of promise, certainly.
01:22Wow.
01:23So India stands out.
01:25Interesting.
01:26Okay.
01:27Can I just probe that question a little bit before I get to the Fed action and the resultant
01:29impact thereof?
01:30So I'm told by your team here that this conference has 30 percent more participation than the
01:36previous year.
01:37It's probably the largest interest that the global investing community has shown.
01:41You were in New York.
01:42You are kind of corroborating that.
01:44Everybody when I talk to about India has one question, which is, oh, valuations are expensive.
01:50And then I hear the people who are investing saying that valuations in India have always
01:54been expensive.
01:55So therefore, we have to go in with that concern at the back of our mind, but there is no other
01:59choice there.
02:00So I'm just trying to understand when you think about India, and when you look at the
02:04interest that is there, does valuation become an impediment, or is valuation something that
02:09you keep an eye out for, but not necessarily an impediment?
02:13Well, I have two hats of an economist and a strategist, right?
02:17I mean, as an economist, I look at more medium-term trends, right?
02:21You can say that, you know, India things are, generally speaking, going well.
02:25A lot of these macro imbalances that India used to have, a very large current account
02:29deficit, very large fiscal deficits, they have shrunk, and India macroeconomically speaking
02:34is in a better place.
02:36It is, you know, largest population in the planet.
02:39It doesn't have the demographic challenges of other places, including China or developed
02:45market economies.
02:47So from that perspective, there's a lot of promise, and there's optimism.
02:52From the strategy side, obviously, valuations do matter, right?
02:55Because you have to speak to investors that have an investment horizon for the next three
02:59months, or maybe, you know, if you're more long-term, it's one year, right?
03:05And we think that you need to be mindful how much markets have rallied already, and then
03:09you reduce your chips and put them somewhere else.
03:12So that is always a stop-and-go process.
03:16So certainly, Indian assets have done well.
03:19Can they continue to do well?
03:20Yes, I think they can.
03:22But I'm not going to go against someone that says, hey, Indian equities are expensive,
03:26they have rallied a lot, maybe it's time to take profits.
03:29The question then is, okay, if you sell here, where do you go?
03:32The opportunities are not that plentiful, to be very honest, and especially, and we're
03:36going to be discussing this in a minute, I'm sure, a head of U.S. elections that can alter
03:43the playing field.
03:45It is a difficult moment to make big investment decisions, right?
03:50So I would say that macroeconomics are going in the right direction, and I think that for
03:55those investors that choose to stay long in India, I don't think they'll do badly.
03:59Okay.
04:00It's an interesting time to have an India investor conference, wedged as it is, between
04:04the start of, presumably, the start of an easing cycle, but just before, a couple of
04:11months before, the big election.
04:13So how do you juxtapose both of these when you're trying to take a call on EMs and India?
04:19Let's maybe start with the Fed, maybe?
04:22Well, the Fed, certainly, I mean, we have had so many false starts related to expectations
04:27of Fed easing, right?
04:29Remember that we closed last year, started 2024, expecting the market price in 7.25 basic
04:34point cuts.
04:36That would start as early as March, or guess what, that didn't happen, right?
04:40And it only started, literally, last week, September, mid-September.
04:44Started in a bold way, 50 basis points, in line with what our U.S. economists expected,
04:50although that was not a consensus view, you know, some people were thinking that it could
04:52just start with 25.
04:55If you look at the combination of Fed easing, right, and a U.S. economy that is weakening,
05:01for sure, that is what is allowing the Fed to ease, but is moving more towards what we
05:05would describe as a soft landing.
05:07There is some odd probability of recession, which is not to fully discount, but the probability
05:13of recession is maybe 25, 30 percent, I don't know.
05:17The data, though, doesn't seem to suggest that we are, recession is around the corner,
05:21right?
05:22That's why we are more comfortable, our best case scenario is soft landing, not recession.
05:26You have a situation where the Fed cutting is going to allow EM central banks to cut.
05:30Some of them already started, some of them started and then slowed down because the Fed
05:34wasn't moving.
05:35As soon as the Fed starts moving, that's the green light for central banks across the
05:38world, including India, you know, to pursue easing.
05:42U.S. not going into a recession means that there is support for global growth.
05:48China deceleration is an issue for EM.
05:50The good news about China is that it is decelerating, but its commodities demand, which for many
05:56countries is an important link to China, remains rather strong, so they're not feeling the
06:02pinch from Chinese economic deceleration.
06:06So you look at all these factors and it's like, okay, what's not to like?
06:09And we are expecting that, you know, all else equal, we may see more capital flows coming
06:14into emerging market economies.
06:16All this said, the problem is the U.S. elections, right?
06:20And there are some pronouncements, some proposals that are being espoused that could alter these
06:27dynamics, particularly, you know, the broad use of tariffs that one of the two candidates,
06:32you know, former President Trump is proposing in a very clear way at this stage.
06:37So, you know, we have to believe that he'll try to move in that direction.
06:41That could have some important implications for EM.
06:44And that is why I think that right this minute, even though the environment is turning more
06:48supportive for emerging markets, and India is included in there, I think that investors
06:53probably are holding their breath, right, and say, well, we have this very important
06:57event a couple months from now, let's not rush to conclusions here.
07:02Also, coupled with that, I'm just thinking out loud that if you look at the EM basket,
07:08the four large ones, three of them, China not feeling the pinch but slowing, Korea,
07:13Taiwan kind of slowing, India probably standing out.
07:16So therefore the case for making a full scale beeline for EMs, because of this and ahead
07:23of the elections, therefore, might be not that strong.
07:26So would you believe that while in the past, a rate easing cycle has led to presumably
07:35a flow of, a sizable flow of money into emerging markets, this time around, in the immediate
07:41future, the next two months or three months, that flow might not be as strong?
07:48It may not be as strong, generally speaking, just because we have this discrete, we're
07:52late in the year, right, allocations for the year have already been made.
07:56So I think that the promise of stronger capital inflows for EM is more at 2025 rather than
08:03late 2024 event, right, promise.
08:09But again, a lot will depend, what can upset this picture is a US election outcome and
08:15what whoever gets elected does, right.
08:18So US elections, whether we like it or not, do matter for markets, do matter for the US
08:23economy, and has repercussions for EM.
08:26So I think that, you know, let's hope for the best, right, that some of the more extreme
08:32policy proposals that are being mentioned so freely in this campaign don't come to fruition,
08:37do not materialize, and that all the other elements that are supportive for capital flows
08:42coming back into EM, you know, do end up materializing and do end up generating the
08:48inflows that we all expect.
08:49Yep, cross fingers for that.
08:52The other aspect of that is also the fixed income market in India, and the JP Morgan
08:57bond inclusion index, some other indices following suit.
09:00I mean, the expectation was of, whatever, 30 odd billion in the current fiscal, and
09:05then as the years go by, some more.
09:09What is your view, not on Indian equities, but on the other aspect, which is the Indian
09:13fixed income?
09:14Any thoughts there?
09:15Well, something very interesting is happening.
09:17So the announcement of India index inclusion happened already a year ago, I think, certainly
09:25way ahead of the start of the inclusion, which happened in June this year, right?
09:31Before the index, the formal processes started, we calculated that, you know, going from zero,
09:38so basically India not including the index, to that 10% that India will eventually have
09:42in the index, if people just wanted to replicate the index, given how much of assets under
09:48management use this index as a benchmark, the GBIM, we calculated between $25 and $30
09:55billion, as you said, of purchases of Indian government bonds, right?
10:00Before the processes started already, there was $10 billion of foreign investment into
10:05the Indian bond market.
10:06So people started to anticipate inclusion, and they started to buy.
10:10So there was, strictly speaking, $15, $20 billion left, let's say, of inflows.
10:15If you divide that by the 10 months, we're talking about $1.5 to $2 billion per month.
10:26What we have seen, June, July, August, we still don't have a full number for September,
10:31we have seen around $2.5 billion of inflows into the Indian bond market per month, right?
10:37So more than what the pace that we were expecting, which is good news, right?
10:43But you wonder why, and I think that there's, I'm sure, a lot of technical reasons.
10:50The bonds had a wider spread compared to swaps, so there was an asset selection that favored
10:55bonds.
10:56I think that, I want to say, that's probably one demonstration of the interest and appeal
11:05of India.
11:06And I have to say that within the Asian context, India has now become, is increasingly becoming
11:12an interesting, a liquid, quote unquote, high yielder, right?
11:16The other high yielder is Indonesia in this region, right?
11:21Yields are higher than, certainly, Korea, Thailand, and other countries, or China, for
11:26that matter.
11:27But, you know, there are some question marks on the fiscal side, on the political side
11:33in Indonesia that are probably keeping investors a little bit more cautious.
11:38And India, well, we already mentioned, right?
11:40I mean, the macro disequilibrium, disequilibria that was dominant years past have been addressed
11:49or reduced, so there's more comfort with India.
11:51So I think that's a good demonstration.
11:53So beyond the equity picture that we described before, in the fixed income side, there is
11:57also, so far, you know, the optimism is materializing in more inflows, interestingly.
12:02Nice.
12:03Just, does the favorable macro indicators, I mean, the current account deficit looking
12:10very okay, forex reserves high, and for a net commodity importing country, the fact
12:14that commodities have come off, including oil, does that augur very well for the story
12:19to stay attractive going into the next six to nine-odd months, even as we are looking
12:24at the U.S. elections coming around November?
12:26Yes, and particularly in the case of oil, right?
12:28So oil prices, we, our team, has a projection that oil prices are going to see, are going
12:37to point lower next year.
12:39So far, the market has been relatively balanced, meaning supply and demand matching each other.
12:45That has been accomplished.
12:46There's been more supply coming from non-OPEC producers, you know, the likes of the U.S.
12:51itself, Brazil, Syria, Namibia, Senegal, Guyana, you name it, and the ones that have been keeping
12:58the market balanced has been Saudi Arabia, and actually Russia, for that matter, is OPEC
13:02plus, you know, doing the cuts.
13:05For next year, there is a question mark as to how much OPEC is going to be willing to
13:10keep cutting production to offset the higher production from non-OPEC.
13:16And some of the rhetoric, and there's an OPEC meeting before the end of the year, so
13:19we'll find out soon enough, I guess, some of the rhetoric is that they are running out
13:23of patience, of losing market share, and they may not be willing to do it, and maybe they
13:28shake the market up by, hey, we're going to increase production, allow oil prices to go
13:33lower.
13:34We don't know.
13:35But even without that, given the projections of supply and where we're seeing demand, our
13:41team expects oil to maybe finish next year in the mid-60s, you know, per barrel, right?
13:48We have been hovering between 70 and 80, as you know, for a long period of time now.
13:53So we're entering a lower oil price period, which is obviously supportive for India, right?
14:04And interestingly enough, both Trump and Harris, as candidates, a lot of their pronouncements
14:10also they want to push for lower prices, different strategies, but lower prices as
14:16well.
14:17That is not in our projections.
14:18Well, 65 is just supply and demand, does not incorporate a U.S. elections outcome, does
14:23not incorporate a U.S. recession that could happen, or doesn't incorporate an increase
14:28in production by OPEC, right?
14:30So I think that all the risks point south for oil, which is good news for India.
14:36Which is good news.
14:37And my final question, really, Louis, what about the risks to this quote-unquote, not
14:42quote-unquote, but kind of Goldilocks scenario, if you will, geopolitically favorably placed,
14:50growth-wise reasonably favorably placed, looking at what's happening around the world, macros
14:54looking pretty OK, too.
14:56What are the risks to this?
14:58The risks honestly come at this stage more from geopolitical or political outcomes, right?
15:04So technically, we have seen the situation in the Middle East, very complicated.
15:07So far it's been the right trade, quote-unquote, to fade the geopolitical risk, meaning that
15:14all the nasty headlines that we have seen coming out of Israel-Gaza and expansion and
15:19all these proxies of Iran, et cetera, no single barrel of oil has been affected because of
15:24all these dynamics, right?
15:25So when oil prices at the beginning of the conflict, when there was an attack on Israel
15:30last year, oil prices went higher, that didn't last for too long and for a good reason, which
15:35is there was no – there's no tightness generated in the market whatsoever.
15:40But every day we wake up to some new news, right, and we cannot completely rule out that
15:46there's some kind of event or miscalculation, whatever, that ends up eventually affecting
15:51oil markets.
15:52And that could be the one risk, area of risk that I think – there's no risk premium
15:57in the market right now in prices that could surprise us, right?
16:02So something to watch.
16:06And the other one – well, I keep going back to the U.S. elections.
16:10If former President Trump gets elected, he is trying to push for these tariff increases,
16:17so he's trying to bring back production manufacturing to the U.S., right?
16:22He doesn't believe in French shoring or near-shoring.
16:24He wants reshoring, right?
16:26Come back to the U.S.
16:28Let's lift import tariffs so that – to make imports more expensive and let's create
16:33incentives for people to bring manufacturing back to the U.S.
16:37The problem with that is – well, there will be higher inflation in the U.S. possibly,
16:42so it is a fallacy that that tariff is going to be paid by the exporter countries.
16:47No, the tariff is going to be paid by the U.S. consumer, right?
16:51So that is one aspect of it.
16:52But for the rest of the world and emerging markets, which is what we're talking about
16:55here, you know, the way in which countries are going to respond, and particularly China
17:00– China, he wants to slap 60 percent tariffs, right?
17:03It will be – the currency will do part of the adjustment.
17:06The moment that CNY, the renminbi, the Chinese yuan depreciates, right, that is going to
17:11make Chinese exports more competitive, right, or compensate part of the tariff for exporting
17:16to the U.S.
17:17But for the rest of the world, particularly Asia – and I think that India will probably
17:22get its share of impact – it will generate a flooding of cheap exports from China to
17:30the region, right?
17:31So that would compete with India manufacturing, Korea and Taiwan, you know, Japanese manufacturing.
17:38So there will be pressure in all these countries either to impose their own tariffs on China
17:41and – or depreciate their currencies in order to not, you know, lose competitiveness
17:48vis-a-vis Chinese exports, right?
17:51So it is – it feels like a race to the bottom, right?
17:54You know, we hope that we don't get there, but, you know, that is – you're asking
18:00me for risks?
18:01Well, I'm describing something to watch.
18:04Much, much appreciated this.
18:05But fantastic talking to you, Luis.
18:07Thanks for laying it out so well, the global construct and how it could impact India, because
18:12it's great from an Indian investor's perspective to keep an eye out on some of these.
18:16So really appreciate your time.
18:18Pleasure to be here.
18:20Not at all.
18:21And thank you for tuning in to this fantastic conversation with Luis Organes, who looks
18:24at the global macro research at J.P. Morgan right out of the J.P. Morgan India Investor
18:29Summit.