Mayuresh Joshi, Head Equity, Marketsmith India, says in the Indian context, a large part of expectations or consensus of the market is there might be a token rate cut with the food inflation expected to head lower in the next couple of months and therefore, a token rate cut not ruled out in February. Outside of rate cuts, the moot point will be how earnings play out and how geopolitics shapes up over the next few weeks.
While the Fed has cut rates by 25 basis points, it is the commentary that has spooked the market. Next year, instead of a four, now there will be just two rate cuts. Markets reacted negatively, and there was a big sell-off in the global markets that ensued. The D-Street also followed suit. How are you reading into Fed Chair Jerome Powell’s comments there?
Mayuresh Joshi: So, two things. One, in terms of the expectations of the rate cut, it was as per the market consensus. But to a large extent, the market consensus is also of the opinion that the tone probably might be hawkish and it has turned that way. So, you are definitely expecting to see a pause on how the Fed moves in January and then probably you might see a token rate cut that might happen on how data points probably work. Now, it is largely unknown what Trump will do after he resumes office on January 20th. Are we going to see a significant amount of tariff wars being played out? Are we expecting to see some elements of corporate tax cuts that probably happen? Therefore, the core inflation, which is very sticky at this juncture, might be well above that 2% mark that the Fed has probably assumed in its latest dot plot.
So, to that extent, markets might just take this in its stride in the next few sessions and then head back in terms of how earnings will play out. The entire pivot for the markets will be on how earnings will play out. And if earnings remain stable, my own sense is that markets will react correspondingly.
Similarly, what you have probably seen in the Indian context, a large part of expectations or consensus of the market is there might be a token rate cut with the food inflation expected to head lower in the next couple of months and therefore, a token rate cut not ruled out in February. But again, how the globe probably moves, what happens geopolitically, if inflation also remains sticky in the Indian context, we will have to wait for RBI commentary on how they readjust to the global cycle and the Indian context as well. So, the moot point outside rate cuts will be, how earnings play out for global markets and how geopolitics shapes up over the next few weeks.In India, the rate cut for February is still being expected and while the domestic macros warrant it, do the global macros and now, of course, the Fed’s hawkish stance really make the decision harder? And what could be RBI’s rate cut path for the next year then?
Mayuresh Joshi: What former governor Shaktikanta Das had been saying consistently that they will look at data points and how data points are playing out. Obviously, our own context is the 4% benchmark that we adhere to as a threshold. Therefore, the expectations in terms of a better kharif output that has come into the market, expectations of inflationary pressures created specifically by food expected to come down will mean that there will be some element of respite as far as the overall inflation dynamics are concerned.
Having said that, a token cut is not ruled out. That is the consensus in February. But after that, it will be largely how global markets are behaving, how the Fed probably moves, how the European Central Bank is expected to move, how inflationary data points across the globe are moving. In our own context, whether food inflation is inching lower to that 4% mark before the next rate cut cycle happens, really depends on how data points play out. So, again, a token rate cut was not ruled out. The trajectory depends on the data points which the market will probably follow.
Now the money movement is going to be in higher yielding asset classes. If the interest rates are elevated for longer, then further movement of money could be seen from the emerging markets. We have already witnessed heavy FII selling as far as Indian markets are concerned. The dollar index is rising. We see a lot of macro headwinds coming in as far as Indian markets are concerned. Moving forward, what could move the needle for Indian markets? Is it just the earnings growth for India?
Mayuresh Joshi: So, two things. One, obviously earnings remain as a base case scenario for not just the Indian equity markets, but for the US markets as well. How earnings will play out will have a defining scenario in terms of forward multiples as far as markets are concerned. The second element obviously is government capex. There is a huge expectation on what is probably transpired because of elections. It had got constrained to a large extent. Therefore, in the second half, there should be a significant amount of government capex that comes through in the system.
On 1st February, as we head into the new year, the Budget will be announced and in my opinion, there should be significant allocation that probably takes place in terms of capital spending as well. 11.1 lakh crores last year, that should be increased by at least 10% to 15% as we head into the next year supporting growth.
Let us not forget that Trump has also promised that he will have his own version of aatmanirbhar USA with a lot of investments expected to come into the US market and self-reliance there as well. Therefore, supporting growth through budgetary support is going to be paramount.
Obviously, the trigger points that the market will look out for outside earnings and government capex will be how private capex comes back because that is the third leg that is extremely critical in terms of the overall micro growth that one talks about in terms of the overall support of GDP growth. If private capex starts coming back slowly and steadily, my own sense is that the domestic economy and the consumption patterns that we will see over the next few quarters should sustain.
Flows are sustaining in terms of SIPs as far as equity markets are concerned and even if FII probably have some element of resetting done, both in terms of global factors, in terms of the US 10-year which has reached 4.4, which has obviously a large part of the risk premium that they have towards emerging economies. There will be some element of rupee depreciation because we need to be extremely competitive with other players, including countries like Thailand, Vietnam, and let us not forget China in terms of our exports irrespective of what tariffs come through.
Therefore, all these three factors put together will have a huge say in terms of market. So, there are sufficient amounts of triggers that the market can deal with, but the base case, as I said, remains with how earnings play out if markets have to sustain their lofty valuations.
