Buying stocks today seems like a good idea: Julius Baer's Mark Matthews

We don't categorise markets in terms of developed versus emerging as much as we analyse individual markets with their unique attributes, said Matthews

The Indian markets have been performing well, with the National Stock Exchange Nifty hitting the 20,000 mark last week, and small and midcaps continuing their upward trajectory. In an email interview, MARK MATTHEWS, head of research for Asia at Julius Baer, discusses with Puneet Wadhwa how the Chandrayaan-2 mission and the recent Group of Twenty (G20) New Delhi Summit have put India even more in the limelight for investors seeking alternatives. He suggests that China is no longer an attractive alternative for them. Edited excerpts:

How do you see global equities playing out in the next six months?

US stocks have been in a bull market since June when the S&P 500 surpassed 20 per cent from its October 2022 low. When we examine all the bull markets of the past 100 years, three-quarters of them have seen returns exceeding 30 per cent. So, the odds are good that there is still more to come. Buying stocks today seems like a good idea.

Would you tilt more towards emerging or developed markets?

We don’t categorise markets in terms of developed versus emerging as much as we analyse individual markets with their unique attributes.

In our opinion, the US market still stands out as the best, given its high return on equity.

India is among the other markets we recommend, along with Switzerland, Sweden, and Japan.

When do you expect global central banks to pivot?

Rate hikes are coming to an end around the world, led by the US, where we believe the last hike of the cycle occurred in July. Some smaller central banks have already started cutting rates, while others have announced that they are on hold.

We anticipate that the US Federal Reserve will make its first rate cut in May next year, followed by another in September, and then two more in January and June of 2025, ultimately reaching a terminal rate of 4.25 per cent.

Ten-year Treasury bonds had negative returns in 2021 and 2022 and are flat year-to-date.

When we look back in history (the data goes back to 1790), we find that there have never been three consecutive years of negative returns for US government bonds. Hence, now might be a good time to consider buying bonds, such as US investment-grade corporate bonds, which have an average yield of 5.7 per cent.

After manufacturing, the markets seem to be pinning hopes on the China+1 strategy regarding foreign institutional investor (FII) flows into Indian equities. Are we being overly optimistic?

Generally, foreign portfolio investment follows foreign direct investment. India has the world’s largest young, growing, and increasingly affluent population.

Physical infrastructure has been established to accommodate manufacturing, which did not exist a decade ago. Early pioneers like Suzuki have already proven that it makes sense to manufacture in India. However, I wouldn’t attach as much importance to FIIs as we did around a decade ago because domestic fund flows have since become larger, and much of the domestic fund flow is systemic in nature (i.e., for retirement).

Other markets, such as Australia, where domestic funds are constantly buying equities through systematic investment plans, demonstrate how powerful a cushion they provide to fickle foreign funds.

How big a threat are rising oil prices to the rally in Indian equities?

While Saudi Arabia and Russia are reducing their oil production to boost oil prices, they understand that excessively high oil prices can become a drag on demand, causing prices to drop again. Even they are uncomfortable with excessively high oil prices.

Saudi Arabia and Russia also don’t want to make the effort to cut their production while other oil-producing countries keep their production unchanged and take a free ride. Therefore, these production cuts 

will not last forever.

Meanwhile, Europe and China are flirting with recession, and oil inventories are high worldwide. We see little reason for the oil price to go higher.

For India, the point at which oil becomes a significant headwind for the economy was previously around $80 a barrel. In any event, we expect the oil price to return to $75 over the next year.

While there are always potential risks, oil is currently not one of them.

The Chandrayaan-2 mission and the recent G20 New Delhi Summit have put India even more in the spotlight for investors seeking alternatives, and China is no longer a viable alternative for them.

What’s the outlook for small and midcaps in the next three to six months?

Small and midcaps typically outperform in very mature bull markets, so I wouldn’t expect that just yet.

What has been your investment strategy thus far in 2023-24? Are there overweight and underweight sectors?

We favour financials, materials, and select consumer stocks, but we are generally sector-agnostic, preferring to identify companies whose earnings are projected to double within the next five years, regardless of the industry in which they operate.