US Fed Chair Powell is buying time to cut rates as inflation remains sticky in the US. The markets will typically react favorably to a rate reduction. Meanwhile, US stock markets had their greatest first quarter in five years thanks to artificial intelligence (AI) businesses. Elsewhere, global economies are finding themselves in a tight spot. Japan has terminated its long-standing policy of negative interest rates, and China, a major contributor to global growth, is making every effort to arrest its declining GDP.

In an interview with Financial Express Online, Rajesh Cheruvu, MD and Chief Investment Officer of LGT Wealth India, examines these worldwide challenges that concern investors.

Following the Fed’s decision to hold rates steady in January, what are your expectations for the remainder of 2024? Will there be potential rate cuts?

We expect to see US FED rate cuts in the second half of the calendar year; according to the dot plot of the FED, we could see three cuts in 2024. Consumption and jobs data are already softening; further weakening of these prints could exert pressure for early cuts by FED.

We’ve seen a surge in interest in Artificial Intelligence (AI) companies. Is this a genuine long-term trend, or just a fad?

We have not seen many meaningful players in this space in the domestic market. Most players have less significant offerings from the overall scale and scope of opportunity. However, this could gain momentum over the next 4-5 years, with domestic semiconductor manufacturing expanding its scope to the design stage. Hence, Investors are better off playing this in their offshore portfolios now.

Given the high valuations of some AI-focused companies like NVIDIA, should Indian investors with a moderate risk tolerance consider alternative ways to gain exposure to AI growth?

AI opportunity has started unfolding in the developed world for some time. There are many ETFs to participate in this opportunity; investors could look at them based on their size of assets, expense ratio, and tracking error of those funds.

How much international diversification should Indian investors aim for in their portfolios?

As part of asset allocation and associated risk diversification Investors could look at having geographic diversification in their portfolios. Being an emerging market currency, the rupee’s gradual weakness is due to differentials in inflation and trade accounts.

Further, increasing dollarized consumption of domestic consumers for their lifestyle goods, children’s education, and leisure travels needs a natural hedge from domestic currency weakness. Keeping these aspects, investors could allocate to offshore investment opportunities as part of their overall assets, the quantum of allocation is dependent on the size of the portfolio and end uses.

Are there specific regions or sectors outside of India that hold promise for strong returns in 2024?

US equities have been consistently delivering high growth and exceptional profitability. Strong innovation may continue to sustain U.S. market outperformance in coming cycles.

Followed by the Japanese economy which has been maintaining its recovery. Weakness in the Japanese yen augurs well for the exports and demand outlook there. We are positive about the U.S. and Japan and cautious about emerging markets, such as ex-Asia and Europe. We are constructive on Communication Services, Information Technology, Health Care & Consumer Discretionary among global sectoral allocations and negative on Energy, Materials, Utilities, & Consumer Staples.

With economies like Vietnam and Indonesia experiencing rapid growth, what investment opportunities are there in these emerging markets?

Among Asian emerging markets, India is a bright spot with respect to macro and earnings growth.

How will China’s economic slowdown and regulatory changes impact Asian markets as a whole?

Deflationary trends and the slowing growth of China will weigh global growth at large and pricing imbalances in other emerging markets. This would force respective governments to adopt import barriers to protect local manufacturers. Overall, most of the Asian markets will continue to pursue internalising their supply chains to reduce dependence.