The latest Fed policy decision seems to have unnerved the market. What are your thoughts?
I think there are a few layers here. First of all, the Fed is clearly behind the curve. And their credibility has been damaged by what has happened with inflation and the monetary policy response over the last few months. Investors, policymakers, and central bankers thought they could determine the natural path of things and account for all different scenarios, but the unintended consequences of all of their decisions have been very difficult to fathom. There is a clear slowdown being experienced in the West from monetary policy tightening, and it has got some way to go.
Do you see a further sharp fall in the market into 2023?
I think we are going to test the bottoms. It’s going to be sharp in parts. Today, we know what to expect from the Federal Reserve more than we knew six months ago. The two big questions we are yet to conclude on are how will the Russia-Ukraine war resolve and how China comes out of Covid. Those two results will drive the markets. If there is an escalation in Russia-Ukraine and people get nervous about what Putin is saying, then it won’t be about markets, inflation, interest rates or recession. It will be something totally different. China could come out of Covid positively. Russia-Ukraine will be a bit more difficult to predict.
So, will the impact on markets be similar to the 2008 financial crisis?
The financial system may not creak the same way it happened in 2008. There will be pockets of stress around the world here and there but as a system, I don’t think that’s the case. If you look at the fiscal situation, there are stresses in the UK and the US. What you are seeing around the world is a reset. The big elephant in the room is the Russia-Ukraine situation and how that plays out.
Local investors believe India is an island of safety. Do you agree?
Directionally yes. But ‘island of safety’ is probably a pretty strong expression. India hasn’t changed very much. There are new policies in place, but the overall complexion hasn’t changed. Look at what has happened in Europe and China. You put it all together and India is like an oasis because it is a domestic story. You are seeing a new credit cycle develop. The digitisation of the economy has accelerated post-Covid. That in itself will keep a lid on inflation because the amount of productivity improves as the economy shifts at the margin from offline to online.
Will the current shift in foreign investor interest from China to India after Covid be long-lasting?
There has always been a consideration between China and India as a destination for money. And with what has happened in China in the last 12-18 months, such as Covid and much tighter regulation of parts of the new economy, a lot of foreign investors have taken money away or have shifted their focus from China. We are seeing much more interest in India. And by that, I don’t mean people who are already invested are increasing. I am talking about new sources of money – institutional interest in India. We have had some large, sophisticated Western institutions come to us and ask us to help them increase the allocation to India meaningfully.
Are India’s rich valuations compared to other Emerging Markets deterring you?
It is a consideration. But the most important thing we look at is long-term growth and sustainability. Whilst the valuation premium has gone up, the growth picture is looking better. At the same time, elsewhere it’s looking murkier. India looks relatively expensive, but that’s the case because elsewhere there has been derating.
What is your evaluation of the plunge in various currencies including the rupee?
The currency movements are quite a sharp reflection of what the future will look like. The biggest pain in terms of currencies has been the Japanese yen, the British pound, and the euro. The rupee is at a low but it is not a sharp reset. This has been a gradual decline over an extended period. So, the markets are telling you where the stresses are, where the imbalances are and where the risks are.
Do you see a recession in 2023?
In the developed world, yes. It is going to impact probably in ways we can’t even imagine now. There is a whole confluence of factors, driving markets, and geopolitics. And we have got a new set of variables, for example, the situation between Russia and Ukraine. Europe is going to have a very, very painful period for at least the next 12 to 18 months, possibly longer. If you look at Germany, now, the sense of resilience has been shattered. The one thing that is very rooted in German policymakers’ psyche is this obsession with inflation. The US is going to slow down. The housing market is slowing down, consumption is slowing down. But they will come through it because the US has a very broad, secure, resilient, self-sufficient economy. It will be a very tough recession in the West.
What will be the impact on Asian economies including India?
In Asia, the emerging world, it’s probably not going to be as bad. There will be a spillover because a lot of countries in Asia are externally driven. India will be less impacted because its economy is domestic-driven. We have to think about how China comes out of Covid in 2023, which should be a positive thing.