Global investors will continue to invest in India, says Julius Baer CEO

The Budget lacked any major announcements pertaining to the financial sector, infrastructure, real estate, and exports, which are all critical for reviving growth, says CEO Ashish Gumashta

With the Budget for FY21 presented and the Reserve Bank of India’s review of the Monetary Policy over, ASHISH GUMASHTA, chief executive officer, Julius Baer, tells Puneet Wadhwa that the markets' focus will return to fundamentals — the economy and earnings — as well as global cues, especially the coronavirus scare and its potential impact on global economies. Edited excerpts:

What is your interpretation of proposals in the Budget?

There was a widespread expectation of big-bang reforms and some growth stimulus from this year’s Budget for reviving the economy, which has been witnessing the worst slowdown since the global financial crisis. However, the Budget fell short of heightened expectations. Overall, the Budget lacked any major announcements pertaining to the financial sector, infrastructure, real estate, and exports, which are all critical for reviving growth and business sentiment. The much-needed growth stimulus, anticipated by the markets, was missing. Now that the Budget is out of the way, the equity markets will focus back on fundamentals — the economy and earnings — as well as global cues, especially the coronavirus outbreak and its potential impact on global economies.

Do you expect the markets to consolidate now?

Yes. In the near term, we expect them to pause and consolidate at the current levels. However, economic indicators are bottoming out and should gradually improve from hereon. Investors should view interim corrections to build up their equity exposure.

What are the key concerns for global investors?

Global investors will continue to invest in the Indian markets, despite the current slowdown, keeping the long-term growth potential in mind. Besides, with slowing growth in global economies and potential risks to growth in other Asian markets, given the outbreak of coronavirus, India could stand out as a relatively attractive investment destination.

The key concerns that global investors currently have about India are around the sequential slowdown in economic growth, tepid earnings recovery, and the credit crisis. While the overall expectation is that there will be an improvement on these fronts, global investors will continue to show a keen interest in these factors.

How comfortable are you with the valuation of Indian benchmarks?

The benchmark indices may seem fairly valued at current levels compared to historical valuations. However, this may not be a true representation of the broader markets, as there has been a polarisation in favour of a few index heavyweights. Moreover, there has been pushback in the earnings recovery cycle as reflected in the muted 5–6 per cent growth over the last few years.

How should investors approach the mid- and the small-cap segments?

With respect to large-caps, investors can continue to maintain their existing allocation, particularly to high-quality growth stocks. However, investors can now look at increasing allocation to mid-caps in their holdings. Over the last two years, mid- and small-cap stocks have seen both price and valuation correction and are now trading at a discount to their large-cap peers. We believe that these stocks can rebound in 2020 if the global momentum continues. In the mid- and small-cap space, we would focus on bottom-up ideas where the company is a leader in its segment or has a niche positioning, there is an operating leverage play, and the stock is trading at a valuation which is close to its multiple-year lows/significantly below the long-term average

How do you see global central banks respond to economic and geopolitical developments over the next few months? What about the Reserve Bank of India (RBI)?

Globally, the trend of low growth, low inflation, and hyper-accommodative central banks is expected to continue in 2020. US Treasuries yields have dropped since the outbreak of coronavirus and will remain low in the coming months until the second half of the year when attention turns to the US presidential elections and the effects of coronavirus ease.

In India, we are nearing an end of the rate-easing cycle, although the policy stance may remain accommodative for a while. The bar for incremental rate cuts will be high. A stagflationary environment is likely to persist in the first half of the current calendar year (H1CY2020) and the RBI may, therefore, remain vigilant and choose to focus on inflation over growth.