Waiting for correction not right approach for India: Amundi group CIO

The US market is pricing in a perfect environment - anticipating inflation to recede to 2 per cent and the Federal Reserve to substantially cut interest rates, Mortier said

Emerging markets (EMs), especially India and China, are poised to attract higher inflows from global investors, even as the US economy is expected to witness challenges, even in the event of a soft landing, according to VINCENT MORTIER, group chief investment officer of Amundi, which owns 37 per cent of India’s largest fund house, SBI Mutual Fund. Mortier, overseeing over $2 trillion worth of investments, tells Abhishek Kumar that due to high domestic flows, valuations in smallcaps and midcaps have become excessive. Edited excerpts:

Amundi expects some pain for the US markets even if it manages to make a soft landing. What is the reasoning behind it?
 

The US market is pricing in a perfect environment — anticipating inflation to recede to 2 per cent and the Federal Reserve to substantially cut interest rates. However, it fails to account for the existing headwinds. The factors that supported the US economy in 2023 are disappearing, with corporates being immune to interest rate hikes due to high cash levels and fixed-rate debt. This immunity will not hold this year, as much of this debt will be refinanced at higher rates.

Consumer spending might take a hit as households deplete post-pandemic savings. Also, with the Budget deficit scaling to 8 per cent last year, the US government will not be in a position to spend as much this year.

The present valuations can only be justified if earnings growth remains in double digits — an unlikely scenario.

Analysts in India do not see scope for major upside this year going by valuations. Do you echo a similar sentiment?
 

I have been in the market for nearly three decades, and India has always been expensive. However, it is expensive for a reason — it is a long-term growth story. Hence, I don’t think waiting for a correction is the right approach.

This year, there is an additional incentive for global investors, as the rupee is expected to remain stable. However, caution is warranted in the smallcap and midcap segments, where a lot of domestic money is flowing in. Due to high demand, valuations can become excessive in narrow markets. In the case of largecaps, there is still some valuation comfort.

What are the possible risks to the growth story?
 

I don’t see any major risks. The Indian market is well-diversified, and various initiatives are underway. The challenge is to create enough jobs and bring the rest of the population out of poverty.

In an economy that is growing with a rising population, the country needs to match the needs, education, and the number of quality jobs. Otherwise, social issues might surface. One area that can create jobs is the renewable energy space.

What is your view on EMs? Can China throw a surprise?
 

EMs are a heterogeneous unit with hardly any commonality or correlation between some of them. So, we need to look at each of them separately.

In the case of China, we agree that the market should be at a discount but not as low as it is now.

Going forward, the economy is expected to deliver 3.5-4 per cent growth, which is lower than what we have seen in the past but still good enough. The real estate crisis has made a dent in the economy, but China’s advancements in technology, artificial intelligence (AI), and its growing share in the semiconductor market are making up for it.

I think the market will pick up once domestic investors start putting in money. At Amundi, we have been advising long-term investors to look at India and China, apart from the core US and Europe markets.

How do you see the Indian bond market? Will its inclusion in a global index also lead to higher interest from active fund managers?
 

It’s a positive sign. While passive flows will start to flow after inclusion, active participation might take time.

Given the elevated interest rates in the US, the yield gap is not that wide between US treasuries and Indian bonds. Once the rate starts to go down, foreign investors will find more value in Indian bonds.

Emerging sectors like clean energy, electric mobility, and AI are making big strides. Is this the right time to go overboard on these themes, and where do the opportunities lie?
 

There is a lot of innovation and value to be created in this space. From this year onwards, investments of over $4.5 trillion will go into renewables every year. In most countries, there is government support, but the projects are run by private companies.

China has the most advanced players. In India, it is the big corporates who have made investments in the renewable space.

China, and also the US to an extent, have a lot of smaller companies operating in this sector. There is a lot of value to be created in these sectors. As an investor, the outcome will depend on stock selection.