'While Indian markets are indeed not inexpensive, the valuations of largecap stocks are still a considerable distance from being overstretched.'
The tight labour market has dashed expectations of interest rate cuts by the US Federal Reserve in March as well as May.
The US central bank will start reducing rates in June, says Vikram Sahu, global head of equity research at BofA Securities.
In an interview with Samie Modak/Business Standard, Sahu says the US elections and Fed pivot will benefit emerging markets this year.
What headwinds and tailwinds are currently impacting global equities?
Our economics team anticipates a mild deceleration in global growth this year, followed by a gradual recovery in 2025.
We believe a hard landing in the US is unlikely as inflation continues to ease, and consumers remain resilient.
We argue that major central banks, including the Fed and the European Central Bank, could commence cutting policy rates in the second half of the calendar year 2024.
A Fed pivot and a resulting easier monetary policy in 2024 could bolster equity markets.
Moreover, economies representing over 60 per cent of the global gross domestic product have national elections this year.
Incumbent government policies are likely to be pro-growth, which is positive for markets.
We remain vigilant regarding three risks: Ongoing geopolitical conflicts, the potential re-acceleration of inflation in the US, and rising fiscal deficits globally, particularly in the US.
Street expectations of rate cuts by the Fed have been undergoing a shift. What implications will it have on global equities and foreign flows?
We anticipate that core services inflation could persist due to a tight labour market, and a Fed pivot in March is now firmly ruled out.
The likelihood of a rate cut in May has also diminished significantly.
We expect rate cuts commencing in June, with three cuts in 25-basis-point increments throughout this year.
Concerning flows, there is a clear negative correlation between Fed rates and equity flows, particularly pronounced in EMs.
For instance, EMs have experienced cumulative outflows of $158 billion since the initiation of the Fed hike cycle in March 2022 and may witness inflows once the Fed pivots.
Do you view US elections as a risk to global equities, or will they enhance performance?
Regarding US equities, markets have, on average, delivered 12 per cent returns in an election year.
Indian equity markets exhibit a substantial 96 per cent correlation with US equity markets, suggesting a potential upside.
The US and Indian markets have rallied sharply over the past year. Will this cap the potential upside?
We believe that the fundamentals for both markets remain robust, and we do not identify any major risks to earnings growth.
However, given the valuations, generating alpha would depend on stock selection, especially in the US, where market breadth has been narrow.
In the Indian markets, we still identify pockets of opportunities within largecaps, where valuations are reasonable (financials), there is a positive earnings outlook from the ongoing multi-year upcycle (industrials), and in sectors that have the potential to rebound (staples based on potential rural recovery).
Are India's expensive valuations a deterrent to investors?
While Indian markets are indeed not inexpensive, the valuations of largecap stocks are still a considerable distance from being overstretched.
The benchmark National Stock Exchange Nifty is trading at 21.5x one-year forward earnings, which is 13 per cent higher than its long-term average of 19x.
Our India equity strategist maintains a positive outlook on Indian markets, despite adopting a conservative stance on earnings.
India's sturdy macroeconomics, resilient domestic flows, and the potential resurgence of foreign portfolio investor flows into EMs following a potential Fed pivot contribute to his optimism.
We recommend exercising caution with midcap and smallcap stocks, where valuations are stretched.
How is artificial intelligence being utilised as an investment theme?
We foresee AI propelling the world economy by $16 trillion by 2030, with the global AI market, covering software, hardware, and services, potentially reaching $900 billion by 2026.
We observe ample funding available for generative AI, with private investments on the rise since 2020, and governments globally aiming to foster AI development.
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Feature Presentation: Rajesh Alva/Rediff.com
