BSH NEWS India story is still exciting, says Mark Matthews

“Not just for India but the world, 2022 is just a turning sideways year. I do not see why it should be a very big down year. The biggest reason I say that is I personally think inflation is peaking even if oil prices are high and therefore the magnitude of the rate hike cycle in America will not be as strong as the market is predicting. If that is right, that takes away a lot of the pressure from the market,” says Mark Matthews, MD, Julius Baer.

If the India story which you always have advocated is strong, why are Indian markets getting such a step motherly treatment from foreign investors? Why are outflows in the last couple of months higher than what happened to Indian markets after the GFC crisis?

It is a bit of a mystery because south-east Asia for example or Hong Kong are actually up for this year and so I do not know why India would be down because it does have a very good story in my opinion. I suppose that simply because it went up so much last year, people would rather buy the big laggards and certainly south-east Asia and Singapore and Hong Kong were big laggards last year.

But the other thing that stuck my mind was perhaps that selling is passive in emerging market ETFs or Asian ETFs and when people are saying they do not want to be in emerging markets as a whole or Asia as a whole, they are probably thinking mostly about China and are not even aware that they have much exposure to India. But I cannot explain it. It is a great positive because if we are going into a rough patch for the US market, then one good thing about India is that foreigners are not loaded to the gills with Indian stocks like they were in 2008. I do not see a lot of pent-up selling from foreigners because it has largely taken place already.

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The last time we talked, you were overweight in India. You said it does not make sense to do portfolio changes based on Ukraine. But given all the uncertainty and volatility. We have to watch out for the US Fed meeting mid March. Are you still overweight in India?

There are a bunch of things to say but the most important is that India is in the middle of an economic up cycle and that has not been experienced for many years. The 10 years before 2020 showed very subpar economic and earnings growth because of non-performing assets in the banks, the structural reforms like the GST and bankruptcy code, etc. Those are now in the rear-view mirror and if combined with the digital renaissance, it is a very exciting economy to be in and that should be reflected in about 20% earnings growth per year over the next two or three years. That one reason makes me committed to the Indian market for the foreseeable future.

Would February 2022 also maybe be the best buying opportunity when it comes to the equity markets?

Well there are not many days left in this month and so if we somehow go down 15% between now and the end of the month then I would say yes; but in the absence of that, I do not think we have gone down enough to make it a buying opportunity. It really depends on the magnitude of the fall. As more time goes by, from the all-time high, the more momentum in the market starts to change and become less positive. Psychologically people start to think maybe it is not the big bull market that it was before.

It does not mean it turns into a bear market but the psychological impact of the market doing that might end up meaning that not just for India but the world, 2022 is just a turning sideways year. I do not see why it should be a very big down year. The biggest reason I say that is I personally think inflation is peaking even if oil prices are high and therefore the magnitude of the rate hike cycle in America will not be as strong as the market is predicting. If that is right, that takes away a lot of the pressure from the market but the psychological damage has definitely been done and earnings growth in America will probably only be in the mid single to high single digits this year, India will have much higher earnings growth this year.

Are you saying that investors who have clearly been shying away from inflation sensitive stocks and sectors at least here in India for the last two to three quarters need to start nibbling if inflation is peaking out soon?

Well intuitively it would. Would it not? You are right and I do notice in the surveys of fund managers that they have their largest overweights relative to the average of the previous decade in inflation sensitive sectors like banks and commodities and energy. I suppose that the issue is that rates will go up and how much more is yet to be priced in.

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