We're overweight on India and will remain so: Julius Baer's Mark Matthews

Mark Matthews, head of research for Asia at Julius Baer, tells Puneet Wadhwa that the markets at the current levels are pricing in more rate hikes than what will actually happen in CY22

With the FY23 Budget presentation behind us, all eyes are now on central bank policies that are likely to impact sentiment across global financial markets. MARK MATTHEWS, head of research for Asia at Julius Baer, tells Puneet Wadhwa in an interview that the markets at the current levels are pricing in more rate hikes than what will actually happen in CY22. Edited excerpts:

What is your interpretation of Budget proposals? Are the capex and growth GDP targets achievable? Have the proposals done enough to provide the much-needed demand push?

Both capex and GDP targets are very bullish and very achievable. It's better to concentrate efforts on key sectors, rather than try to do everything. The key to the development of GDP is infrastructure; so I'm glad to see the primary focus is on that. The government, by doing the initial heavy lifting for investment and creating a virtuous environment for growth, expects the private sector to join capex growth soon. There was also a clear focus on leveraging digital technology across areas, including education, skilling, health ecosystem, financial services, and compliance. Also, the clean energy focus was visible with additional allocation to solar PLI, measures to promote battery swapping, and continuing focus to promote EVs. The numbers presented in the Budget, including for tax revenues and divestments, seem realistic and achievable.

Would the markets react negatively if these numbers were to be revised later in the year and the fiscal deficit was higher than envisaged?

While the FY23 budgeted gross borrowing at Rs 14.95 trillion and fiscal deficit at 6.4 per cent are slightly higher than expectations (as reflected in the rising bond yields), there is the scope of these numbers coming in better than budgeted, as the government seems to be a bit conservative in its revenue estimates. Also, with the focus on stimulating growth through the more productive and long-term oriented capex, which have a clear multiplier effect on the economy rather than the short-term populist spending, a slightly higher deficit number will not be taken negatively by the market.

Where do you think Budget proposals lacked? Any sector that could have got more attention?

There is a bit of disappointment as there was no direct stimulus to spur consumption and no major announcement on privatisation. That said, the focus on boosting manufacturing, as well as an underlined emphasis on areas, such as start-ups, modern mobility, and clean energy, shows that the finance minister has prioritised long-term growth.

How are you viewing India as an investment destination amid these developments? Do you plan to either hike or trim allocation?

We are overweight on India and will remain so. I'm encouraged that Indian equities are outperforming this year — a testament probably to the fact that foreigners were net sellers last year. So, even if this does turn out to be a tough year for the S&P 500 index, unlike in 2008, there's not a lot of foreign money in India that can suddenly depart and push the market down.

What are your expectations of corporate earnings growth in FY23? Will higher commodity prices and inflation eat into the bottom-line?

We look for earnings growth in high teens or low 20s. I am glad that India is allowing people to go about their business despite the Omicron Covid variant, which should keep inflation at bay. Barring a Russian invasion of Ukraine (which we view as unlikely), commodities prices should come down.

Have global financial markets fully discounted the likely US Fed policy moves or there is more pain in store? What other risks are they ignoring or pricing in fully at the current levels?

The markets are pricing in more rate hikes than what will actually happen in 2022. It makes sense to hike two or three times then wait for the impact to play out before getting more aggressive about it.

How do you see global equity markets play out in 2022? Will developed markets (DMs) score over their emerging market (EM) peers?

We expect Covid to become endemic, which means most countries will go back to pre-Covid routines. All this will bring people back into the workforce and repair supply chain disruptions. So, inflation will come down and central banks will not raise rates as much as expected. We still prefer DMs to EMs; within EMs, we like India and think it can return around 10 per cent this year.

How do you see global central banks respond to the Fed's policy moves? What about the Reserve Bank of India (RBI)?

Each country has its inflation trajectory and won’t be beholden to the Fed. That includes the RBI, which we expect to remain accommodative in 2022.