When do you expect the US Federal Reserve to stop its rate increases?
Our current expectation is that rate increases will slow down and dissipate into early next year. The Fed is likely to find a juncture next year where pausing and assessing will be the right strategy. The Fed has already made a very strong statement to the markets and to corporates, and likely will have an impact in 2023. Ultimately, the Fed needed to act to curb inflation. They did so decisively, and the impact will be felt in 2023 and into 2024.
So, are you expecting a US recession in 2023 and 2024?
I won’t venture a very precise thought, but rather suggest that there’s a fair likelihood of some depth of recession. How deep, how long? I personally won’t make a suggestion. But is it likely? Yes. The US internal forces are a tight labour market that has caused wage inflation and a tight housing supply that has caused home price inflation. Both of those are effectively the targets of the Fed’s interest rate increases. Next year, there should be some cooling. And if there is cooling, the Fed will be accomplishing its objective though it could push us into a recession.
Is fixed income looking more attractive than equities at this juncture?
Deciding where fixed income sits relative to equities is a dynamic process. But it’s fair to say that with the advent of higher interest rates, bonds are more attractive than they’ve been for a long time. Until this moment, there was a great deal of risk in duration. That risk actually existed arguably for the last 10-plus years. Fixed income is likely to be more attractive in the near-to-intermediate future than it has been in the near-to-intermediate past because it can offer a real return again. But, over extended periods, equities should still generally provide better returns than debt because of their returns on risk.
Where are you positioning India in your list of emerging markets?
For me, visiting here for the first time post-Covid, I have renewed expectations that India potentially will accelerate, and its attractiveness will grow to global investors and global business operators. As the light moves from some other emerging markets, I think there is a great chance that it will find India. I have said to our team here that the spotlight may come to India as it never has before. You have historically shared the light but India may now get a pure and brighter and wider light. And that’s terrific.
You have been visiting India for the past two decades. What makes you particularly optimistic about India this time?
There seems to be greater consistency, confidence and clarity from the government. Everything from infrastructure, to the quality, sophistication, and drive of industry are all better. And our team here laughs sometimes when I point out that the ride from the airport keeps getting better. That’s a big deal! When you have a better ride, you want to come back sooner. And I say it facetiously. But it’s true. And so I think that the emphasis has increasingly been in the right place; it has been effective. You now have a unicorn class of companies. You have families that have reinvested and become larger and built more businesses. You have many businesses that relative to the first time I came here have gone from SMEs to being serious and large.
There is a section of global investors who thinks China is increasingly becoming uninvestable. In your conversations with global investors, are you actually seeing a large shift in allocations from China to India?
The word uninvestable goes for me with a phrase that I use often with our team: Never say never. Thinking anything is categorical typically comes back to bite us. Having said that, there’s no question that the most recent events in China have caused investors and businesses to look up and, in some cases, to pause and re-examine. We’re probably early in that process because people don’t necessarily reach deep conclusions rapidly. There may be direction, but I think conclusions aren’t necessarily formed or necessarily firm. When you step back, India was already rising in people’s vision and was getting a greater proportion of attention. Might this further support a relative opportunity? Potentially. But I think it’s too early to again make a strong statement on that.
The market has been jittery about the health of Credit Suisse. Are there any similarities to Lehman Brothers in 2008?
The overall financial system and financial markets are incredibly stronger and more stable than arguably they have ever been. And there is nothing in the current moment that I see that remotely suggests the 2008 period. Individual institutions go through change. I am not sure that suggests instability financially. You have seen other banks change strategy, divest businesses, and exit underperformers. That’s business evolution. So, I’m not going to comment on any single institution. But at any given time, there are institutions in transition. Broadly, I think that financial institutions are in a strong position.
FAANG stocks and new-age businesses have taken a fair bit of beating. Is the best over there?
I would separate the business prospects from stock prices. When you talk of FAANG, you can’t leave Microsoft out. These are meaningful companies, and they have to earn it every day and keep evolving. Valuations became very aggressive and that happens from time to time. There has been a rerating. I don’t think people should fixate on valuations or levels of risk-taking. What is important to society is not the stock prices but it’s the availability of capital.
