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ANAND -Hello everyone. Welcome to our new series of Mind Over Markets. My name is Anand Vardarajan. And with me today is Rahul Singh, our CIO for equities at Tata Mutual Fund.  Hi Rahul, how are you doing? How are markets treating you?

RAHUL -  Hi Anand, can't complain. Our markets have been kind, but let's see how it goes from here.

ANAND -Okay. So jumping straight in. Last year Rahul, we saw a low rates, low inflation and good returns. And cut to this year, we are seeing high interest rates, high inflation and possibly low returns?

RAHUL -  Yes. I think if you look at equities in a scenario when the interest rates are going up globally and domestically, and the GDP growth rate is going down, it can't be good news for equities in general, at a very global, at a very 30,000 feet level. Of course, in that context, lot of things happen which happen below the radar and below the main text, you know, stuff like value versus growth, which sectors do well. Some sectors don't do well. And our job obviously becomes more challenging at this point of time, when the overall macro, in terms of interest rates and the economic growth rate is not supportive for equities. But at the same time, there are opportunities in the market like that, in terms of certain trends which change when things like this happen. Certain long term trends change,  certain sectors which were not doing well start to do well and certain sectors which were doing well don't do well. So, it also opens up a lot of opportunities to create alpha in my view. So, that's the flip side of it. And, and I think, overall yes, at the index level, what you're saying is right, but below that there are a few things which happen which makes the market much more interesting.

ANAND -So in this setup, I think the added confusion, if you will, is what we are seeing in the commodities markets. There's this growing debate, Rahul about commodities, getting weaponized. You know, with this kind of a setup, quick word or two on how you see that space panning out and your view on dollar?

RAHUL - Yes Anand, you're right that what is happening in geopolitics today has opened this big debate about, um, how one part of the world would want the commodities to get weaponized, as you mentioned, and become an alternative to dollar, to put it in a very blunt manner. And that's something which has got multiple angles to it. Geopolitics being one, dollar itself with the kind of fiscal position and the kind of spending or the kind of printing which has happened over the last few years is inherently not looking the strongest ever. And also what does it do for India, in terms of the interplay between commodity prices and the dollar strength. So while inherently, a weaker dollar or a stronger commodity universe, let me put it that way, is not the greatest news for an Indian perspective because India is by and large consumer of commodities and not a producer of commodities or producer of resources. So, if commodities do get into a point where they start to become like an alternative to dollar and therefore become stronger, it is something which can start hurting the corporate earnings for India, the overall earnings for nifty 50 for India. And that's really not something which we would want as a country or as a market. On the other hand again, the flip side of this is that if dollar kind-of weakens as a result of this, obviously emerging markets start to do better. The reason why some of the emerging markets are not doing well today, except India; India is by and large, still doing much better than other emerging markets; is because of the stronger dollar. And if the dollar weakens, it is positive for the emerging market flows, and that obviously will benefit India as well. It might benefit the commodity producers more than the commodity consumers, which is where India lies. But that's the flip side and that is the benefit in terms of flows, which a  stronger commodity universe or a weaker dollar kind of a world would bring in. So it's pretty complex to put it in one line, it's very difficult to think of that world because we are not used to seeing that world. I mean, we, our generation, investing generation has seen dollar being the de facto reserve currency. And it'll be a huge adjustment if we were to adjust away from that. It is probably, somewhere down the line likely to happen five years, 10 years down the line. And in between you could have a period where commodities could pave that path, is difficult to say and what kind of implications it might have for India is going to be mixed. But it's not something which is completely ruled out. A year back, before the Russia-Ukraine war, we would've probably thought of this as 5% probability. Now that probability is definitely higher than that. It's a material probability. Still not I would say something which markets are worrying about or we are worrying about, but it's definitely something to watch out for. 

ANAND -So you mentioned about emerging markets and what could happen to, you know, EMs if you know, dollar were to weaken. But in that context, how do you see flows, directed towards India, because on one side you also have China which is kind of slowing down? So do we get disproportionate allocation because within the EM basket, then we will look like an oasis of sorts?

RAHUL -  Yes, you're right. I think even without that we are looking like an oasis right now because relatively, the GDP growth rate or the profit growth rate expectations which we have for India and most of it seems to be panning out, is something which is looking superior to the other emerging markets. And therefore, as things stand today, that is really the case. If the other scenario pans out where dollar weakens, I think overall there is a risk on kind-of environment which will prevail. India actually is benefiting right now because there is still a relatively risk of kind-of a scenario today where emerging markets are not getting flows. And frankly, emerging markets as an asset class has disintegrated because of the problems in Russia and China and so on that India is pretty much standing tall within the emerging markets. And for China, seems like common prosperity is a bigger goal than growth, at this point of time. So clearly they are not going to go after growth the way they were going after. So,  definitely India will stand out within the emerging markets. Having said that, if the commodity baskets were to do better and do better from here, India is probably not going to outperform as much as what it has in the last few months because there are other markets which are much more dependent on commodities for their earnings. Whereas for India, it is the other way around that in all likelihood, our expectations of earnings would start to take a little bit of a knock if commodity prices go up. But still we would benefit with the overall emerging market flows doing well in that scenario. Not as well, because we may not stand out as well in that scenario. But we have become a pretty big part of the emerging market basket, so to say, and therefore, any such flows coming into emerging markets will definitely benefit India as well in that scenario also.

ANAND -Okay, so happy family in one happy neighborhood.

RAHUL -  Yes, it's definitely the case right now.

ANAND -So that brings me to the next question Rahul. I think in investing business, we are told that, there’s fundamentals, liquidity and sentiment are three things which impact markets. Fundamentals is the slowest to move and sentiment and liquidity move much much faster. Given the global setup that you put forth, how do you see the interactions of these three things together and what's what to expect of the markets then?

RAHUL -  Well, I think the fundamentals for India did take a knock.  And I'm, I'm trying to talk more from an Indian perspective here and not very global perspective. But if you look at the trajectory fundamentally for the companies and for the sectors, some of the sectors which are doing well in India, we seem to be diverging in two-three areas, which is, you know, capital goods, industrials, manufacturing, real estate, banks are doing extremely well. And globally, one can't say the same thing for these sectors. For India, the fundamental improvement in the way the investors were looking at India before, and five months or three months before when the Russia-Ukraine broke out and now, is the fact that there is a growing realization that the companies and some of the sectors are also likely to benefit from the increase in the business which is coming India's way, because of the redesigning of the global supply chains which used to be a good catch word, but it's actually happening. I mean, the first hand feedback we get from companies when we interact, is that it is for real. It started with electronics and assembly line operations, but it is now seeping into some real hardcore manufacturing setup, some real hardcore industrial capital good kind-of, heavy engineering kind-of setups. So I think there is a growing realization within the market that there is this wave of benefit, which is coming India's way, starting with the initial China plus one during COVID, but cemented through the geopolitical scenario which we have seen in the last six to nine months. The only thing which can destroy this sentiment and we need to be really watchful and goes back to your last previous question in the previous issue, which we're discussing is what happens to commodities.  Because commodities have cooled off in the last two-three months, after the initial spurt. The slowdown in China is obviously playing a role and the fact that China does not want to grow as fast is actually helping India to sustain that sentiment of improving earnings. In fact, if I take a step back and think about how a global slowdown might actually not be such a bad thing for India, is because it will tame the commodities.  It will tame the commodities from a demand side to some extent, even if the de-dollarization would continue to have a higher impact on commodity prices, the demand itself might start to put some pressure on commodities and that will keep things in check. So in a way, a soft landing globally, including China is the best case scenario from an Indian perspective, because what you don't want is a hard landing with deep recession, long recession in the US, which creates a risk of environment. And that will happen, irrespective of whatever happens to the dollar, that will have a risk of kind-of a takeaway for the rest of the markets. But if it is a soft landing kind of a scenario, which is what the market seems to be factoring right now, and a moderate slowdown in China, which is kind of an engineered slowdown, then it is going to be a positive scenario from a Indian market perspective. And of course, as I mentioned in the beginning itself, it opens up opportunities even if the index does not do well. At the index level, we might make to low single digit returns from these valuations. Below the index, there will be opportunities to try and create alpha.

ANAND -Is there any percolation you're seeing of geopolitics into our industries at a ground level or is it too early? RAHUL -  No, I think it's happening and it's happening as we speak. The feedback, as I was mentioning, when we are meeting companies in the conferences or talking to them over running calls, et cetera, we get a sense that initially, you know, the wave of manufacturing came through the PLI schemes,  which caught further boost from the China plus one strategies and post COVID that kind of got further cemented because I think globally the companies and the buyers wanted to move away from China and build an alternative source. So not only did India benefit, obviously you would've read about Vietnam and so on other countries as well. And that way PLI was well-timed, and it is seeing a decent success. But moving beyond PLI, I think what the geopolitical scenario has done is two things. One, it has increased the cost structure for Europe, clearly and it has improved the chances or the competitiveness of Indian exports versus wherever they were competing on the engineering side or the manufacturing side, or even chemicals. It has improved the competitiveness of Indian exports. And I think that is more recent phenomenon. It is evident in our discussions with the companies that they are also seeing it on the ground. How long will it go and how big can it become is also going to be a function of how long this situation continues and how well the government seizes us on these opportunities to really make it count because if we can make it count as a country and we are able to build a big manufacturing export business or export base, then it eases a lot of our pressures, which typically happens on our current account as soon as crude prices go up. So I think it's  something which is clearly happening. On the ground we sense it, we feel it, the companies themselves are seeing it day in, day out. And that's been, I would say, the most important kind of takeaway or most important kind of positive side of this whole geopolitical scenario. I think it's very, very clear now.

ANAND -Thank you, Rahul. That was really enlightening.

RAHUL -  Thank you Anand.

ANAND -This is a first in our series of Mind Over Markets, where we now plan to invite other members of the investment team along with Rahul. So look forward to seeing you soon.

Disclaimer:

Mutual Fund investments are subject to market risks,  read all scheme related documents carefully.  The views expressed are for information purpose only and are in no way trying to predict the market or time them.  Any action taken by you based on these views is your responsibility alone.  Tata Mutual Fund will not be liable in any manner for the consequences of such action taken by you.  The views may or may not reflect in the portfolios of schemes of Tata Mutual Fund.