These industry sectors in India may perform well even amid challenges to developing markets | INTERVIEW

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August 7, 2020 1:30 PM

Even as coronavirus-led challenges continue to impact developing markets across the globe, some long-pending reforms in India have picked up speed amid the pandemic.

“Overall we like Information Technology, Telecom, FMCG, Consumer Durable, and Insurance,” Salman Haider said.

Even as coronavirus-led challenges continue to impact developing markets across the globe, some long-pending reforms in India have picked up speed amid the pandemic. However, it remains to be seen how the fiscal response takes shape and its impact, said Salman Haider, Head of global growth markets at Barclays Private Bank. Running a team that manages wealth and investments for over 70,000 high-net-worth global clients, Salman Haider talks about what sectors in India he thinks could be a good investment bet and the impact of the growing geo-political tension on emerging markets. Here are the edited excerpts.

In May Barclays told its clients to invest in US equities instead of emerging markets. What is your view on India as an investment option in emerging markets?

When we look into developing markets, challenges were mainly COVID-19 led. In India we do see a GDP contraction, in the full year 2020 but we do think that the steps that the government has taken, including the Rs 20 lakh crore economic package, are going to be really targeted in terms of what it offers to the rural population. To club with this, there are other long pending reforms coming through, essentially in the form of a 10% hike in the national rural employment guarantee scheme, public works, and the free ration that we are seeing across countries. 

When we look at the equity space, quality is very important at this stage globally as well as in India. One thing in relation to India that is extremely important for us to look out for is obviously what happens around credit risk and credit crisis and how the credit risk aversion is out there. Naturally banks, non-banks, mutual funds, retail investors continue to be risk averse. How the credit risk is managed and the bounce back will be critically important for us, as we look at the financial sector in India and see what comes out of it.

Overall we like Information Technology, Telecom, FMCG, Consumer Durable, and Insurance. Those are our preferred sectors even globally. Valuations are stretched but in pharma, metals, cement, and oil and gas we saw demand come back, just as we saw in China. We look at a diversified strategy, but quality Indian equities, global equities with a bias towards US, and even Gold continues to be important because inflation is expected to go up. 

How is the situation in terms of liquidity in the markets looking right now, according to your analysis?

Although July saw a stabilization in the size of the balance sheets of the Federal Reserve and the European Central Bank, liquidity remains plentiful. In fact, in the US, the monetary base grew by almost 23% year-on-year in June and globally, the monetary base is said to have increased by around $8 trillion since the start of the pandemic. At this stage, central banks would prefer to “wait and see” how the situation evolves but their next move, if any, is likely to be towards further easing rather than tightening. In addition, even if central banks stay still, we would expect fiscal stimulus to act as a strong relay and support the recovery.

Foreign portfolio investors deserted India in March, even now their inflows have not been large. What do you think it will take for FPIs to find India as an attractive investment opportunity?

We expect to see developed markets responding better from a fiscal perspective than emerging markets. So, it’s more of a risk spectrum discussion. The fact is that in emerging markets the pandemic can create issues that are potentially less likely to impact those relevant sectors in developed markets.

What remains to be seen is the impact of the fiscal response and the targeted package launched by the government. From a foreign fund perceptive, investors are going to look at valuations and demand for sectors and, at the moment, there is more value in developed markets.

Oil prices are now significantly lower from where they were at the end of last year. What are your views on that and where do you see oil prices heading? Is that a space where investment is viable?

Oil rebalances in a similar way to gold. Easing quarantine measures, geopolitical tensions, another potential COVID-19 spike and low interest rates all seem to speak positively for oil. Sentiment for oil and gold both appears to be largely driven by risks that are around the virus and prospects of a speedy economic recovery. Our Investments Strategy team believes that the OPEC+ group will also continue to stand by their commitment on production cuts. They want to put a floor around prices.

There have been discussions on how strong that commitment is and how that continues. Then you have to see when that demand picks off. Looking at China and India  it is possible to see that coming through. China custom data shows oil imports surging by 19% year-on-year, which is very positive. India is already seeing demand recovery by 23% year-on-year, with a 46% decline in April. Demand for oil is coming in but we don’t expect it to rise as fast as it has since May. An initial strong rebound was absolutely going to be there because activities and industries have picked up. But looking at air travel, for example, we do think it will take time to normalize. There may be incentives on non OPEC suppliers, as well as the OPEC countries, to cut production low, but inventory remains very high across the board. Everyone is dealing with oversupply on oil and it is difficult to see further increase in oil prices in next six to twelve months.

A lot of researchers believe that with the movement of migrant labourers and less impact of the coronavirus in rural India, that it will be rural India that pushes India back to the growth trajectory that we were aiming for, what are your views?

That is the view of our Investments Strategy team as well. A stronger rural sector should mitigate the ongoing economic damage caused by the crisis but not offset it. There is some high frequency data trends that indicate that the economy is normalising in India as well, although the recovery path will be gradual.

A large part of the government’s economic package is to support the rural economy. If you put these significant government measures together, the objective is to raise the disposable income levels of rural households, get spending going. The movement of migrant labourers has meant that the demand for the government support and temporary employment has risen materially.

Tensions between the US and China have been brewing up and have recently spiked. What impact do you think this will have on emerging markets?

Naturally we all know that the US is going into the election phase, so we expect the trade tension, geopolitical tension between the US and China to continue.

From a global trade perspective, I do think that larger countries who have large trading relationships with either of those countries will manage.   Smaller countries, that are heavily reliant on either one market or the other will be trying to balance things, making sure that it makes sense from a trading partner perspective and that it does not upset any political relationships in the process.

Could you shed some light on what are the major problems that Indian economy will face post coronavirus?

It all comes down to what the impact of COVID-19 is, not just in India but in emerging markets as well, as economic packages are rolled out. The key thing that we should be looking out for is the credit environment in India. It will also be important to see if the virus will lead to repeated lockdowns in emerging markets.

Emerging markets that are consumer led will naturally have to deal with that scenario. From India’s perspective, it pretty much comes down to what response will come on the back of this economic package and what we see in the financial sector and the lending space.

Before the COVID-19 crisis, we were neutral and not negative towards India from an investment perspective and we hold up our position as neutral, not underweight. Now it depends on the response in getting consumption back up and getting production going and that’s what we have to look at.

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