The current bout of downturn in the Indian equities is reflective of a "perfect storm" as geopolitical tensions in the Middle East, elevated interest rates, and rising U.S. bond yields weigh on riskier assets, according to Rahul Chadha.
"This is a perfect storm for risk assets. Historically, conflict in the Middle East led to a fall in U.S. Treasury yields; they have now spiked. This is now a new stagflation scenario where yields are spiking and inflation is high. Those have been the concerns," Chadha, the former chief investment officer at Mirae Asset Hong Kong, told BQ Prime's Niraj Shah.
India's benchmark stock indices fell for six consecutive sessions before recovering on Friday, triggered by global headwinds from geopolitical uncertainties, stemming from the Israel-Hamas war and the resultant rise in crude prices coupled with higher-for-longer U.S. rates.
The U.S. economy has shown resilience and a similar trend is being witnessed in India, he said. The American economy accelerated to a 4.9% annualised rate in the July-September period, the fastest pace in nearly two years on a burst of consumer spending, according to him.
Elevated rates and economic slowdown will help bring down inflation further over the next few months, and the first signs of rate cuts will be then around the corner, Chadha said.
"That's where we will see markets move ahead of economic recovery. Markets typically move six months ahead of recovery," Chadha said.
He also drew a contrast with the 2004-2008 boom period of consumer credit in the U.S. and infrastructure spending binge in India, and said the current downturn will be shorter and not like the one that followed in that decade.
Chadha said that private banks would prove to be resilient in this current downturn as there have been no significant excesses in segments like consumer loans. "Most large banks are prudent and well-provisioned for that. There are no large corporate loans that can go bad, that is where risks from delinquencies is lower."
According to him, bank stocks have suffered this year as emerging market funds faced redemptions since one third of EM exposure in Indian equities are banks. "That is where the underperformance we have seen in large-cap banks vs mid caps will reverse in the coming quarters," he said.
Watch the full conversation here:
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