Arvind Chari, Chief Investment Officer at Q India (UK) Ltd, an affiliate of Quantum Advisors
There is a larger macro-structural reason where India may see large inflows from foreign investors. And, that’s due to geopolitics and structural reasons, according to Arvind Chari of Q India (UK) Ltd, an affiliate of Quantum Advisors.
Talking to Moneycontrol, the chief investment officer wonders if investors cannot invest in Russia or Turkey and they get increasingly wary of investing in China, then where they would invest for growth. “India is a large market for allocation, and India is that large market across asset classes,” he says.
What Q India (UK) sees now in India is a natural cyclical economic recovery from the downtrend aided by strong corporate and bank balance sheets, improving demand for real estate, higher fiscal support, and strong FDI capital flows, says the CIO, backed by his 18 years of experience in investment management. Excerpts from the interview:
Why has India been more resilient than its emerging market peers?
India is in a relatively different economic cycle than some other EMs.
If you go back, you will notice that the Indian economy peaked sometime in 2012 and then followed a gradual downward trend till the middle of 2020. Private capex fell, bank credit to industry slowed down as NPAs (non-performing assets) piled up, and residential real estate was stagnant. This was exacerbated by events like the taper tantrum in 2013, demonetization in 2016, RERA and GST in 2017, ILFS and the credit crisis in 2018, and then the initial COVID shock.
So what we are seeing now in India is a natural cyclical economic recovery from the downtrend aided by strong corporate and bank balance sheets, improving demand for real estate, higher fiscal support, and strong FDI capital flows.
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There are some structural changes in terms of increased financialization and digitalization; increased investment in capital markets by retail investors; structural reforms like GST, and IBC (insolvency and bankruptcy code).
This is getting reflected in corporate earnings as the destruction of the informal sector allowed market share consolidation for the large players. With the recovery, they are now benefitting from higher revenues and profitability.
So in the equity markets, you can see the company’s earnings getting upgraded over the last 2 years. This along with the strong domestic buying has meant that despite foreign selling in public equities, the markets are near all-time peaks. The market is essentially saying that despite the macro headwinds, the Indian economic cycle will remain in an upward trend.
There are some macro factors: India’s relative self-sufficiency in food production, forex reserves buffer, and the fact that despite the recent increase, Indian interest rates are below their long-term historical averages which are leading to us being seen as resilient. Indian businesses and self-employed entrepreneurs are used to dealing and working with such volatilities.
If raising the interest rate is the only solution to bring inflation down, then will the Federal Reserve stay on an aggressive tightening path?
In the developed world, the entire onus on fighting inflation rests with the central bank. They rarely use fiscal measures of taxation and price controls to soften inflation. That being the case, the central bank must hike rates to a level where it impacts demand and employment to get inflation to a lower level. (the vice versa was true over the last decade, as central banks took rates to zero and used quantitative easing-QE to spur demand, job creation, and inflation).
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In India, it has been different. The onus on managing inflation rests a lot with the government. So, they have intervened in the food markets to increase supply by reducing exports or increasing imports; changing taxes on items to lower price pressures. etc. So, in India, the RBI may not have to hike much if the government actions soften inflation.
Many experts are talking about a global recession. What are your thoughts on the economic environment in the US, UK and the European Union?
Continuing what I said earlier, the Fed has to believe that the only way they can manage inflation is by hiking rates to reduce demand and thus increase unemployment. This will create a slowdown in the economy (there can be a debate on the definition of it being termed as a recession).
We are already seeing that in industrial commodities, shipping rates, and even oil prices (despite the geo-political tension). These markets are fearing the coming slowdown in demand and hence adjusting for it. You may see some more correction, but it won’t be drastic, as supply concerns remain. What could be drastic on either side, would be oil prices and that depends on the geo-political outcome.
Do you expect the FII outflow to continue in the second half of FY23 as well? What are the investment themes that FIIs are focusing on or want to focus now considering the changing global economic environment?
Most of the selling seen in the Indian markets have been from global emerging market funds, whose India allocation has seen an increase because of the performance of the Indian markets and the relative underperformance of other large markets like China. So, they are selling as their India weight is increasing over the benchmark and India appears relatively over-valued. And that may continue.
However, there is a larger macro-structural reason where we think India will see large inflows. And that is due to geopolitics and structural reasons. If investors cannot invest in Russia, or Turkey and they get increasingly wary of investing in China, then where do they invest for growth? India is a large market for allocation and India is that large market across asset classes.
For that though, global investors need to stop looking at India through a ‘lazy’ lens of an emerging market index, Asia-ex Japan, BRIC, they need to be convinced about having a dedicated approach to investing in India.
The economic investing argument is already there. India has grown in double digits in nominal terms for the last 40 years and can continue to do so over the next 15-20 years. It is the conviction in softer aspects like the ‘rule of law’; strong and democratic market and political institutions; reforms in education and healthcare; and an assurance of fair treatment to providers of capital – be it domestic or foreign.
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