Recession in US unlikely, India resilient, says Stefan Hofer, MD and Chief Investment Strategist of LGT Bank Asia

The $300-billion asset management group believes that India can move structurally higher on a number of levels over the next 5 to 10 years. The recent downturn in the Indian markets has been attributed to profit-taking, noted Hofer.

The medium-term investment outlook for India continues to be positive, with improvements in infrastructure, and a potential shift in the GDP to higher levels, said Stefan Hofer, MD and Chief Investment Strategist at LGT Bank Asia. Meanwhile, the US is unlikely to slip into a recession next year, even as its growth slows down, Hofer said in an interview with Moneycontrol. He shares more insights into the state of global markets and how India is placed in the current setup.

Sharing his views on India’s manufacturing potential, Hofer suggested that with the right infrastructure and scale, India could capture a significant share of the market, particularly as investors seek alternatives to China for new factories. The main challenge in India’s capex and infrastructure plans is execution risk, he noted. Further, Hofer believes the IT sector is close to bottoming out and a turnaround is in sight. Additionally, LGT Bank Asia recommends overweighting healthcare due to its defensive nature and the potential for exciting developments in the sector.

What’s your outlook on bond markets?

The focus on the rising yields on the 10-year Treasury bond has made people nervous, particularly the idea that the 10-year Treasury yield could reach 5 percent. The rise in bond yields is usually associated with concerns about inflation, but in this case, it seems to be driven by worries about excessive economic growth.

The paradoxical situation arises from the belief that the Federal Reserve may need to increase interest rates more than what is currently expected to cool down the strong economy. Despite concerns about inflation, there is also a strong labour market in the United States, with a low unemployment rate of 3.8 percent and positive real wage growth. Consumers are spending more, leading to an idea of ‘revenge travel’ and increased discretionary spending. However, the fear of inflation persists, especially with recent increases in oil prices.

On the contrary, LGT holds the view that the United States is on a disinflation path. We expect the traditional 2 percent inflation target to be reached within six to nine months. They believe that the Federal Reserve may only need to hike interest rates by 25 basis points at the next meeting and then hold steady.

The huge selloff in the US earlier this week and VIX showing an inverted curve—are these indicators of more trouble ahead?

Our view is that the United States will not fall into a recession in 2024. While the growth rate is expected to decrease, it should remain positive. The Federal Reserve has managed the steepest interest rate hiking cycle without causing a recession, which is historically unprecedented. Despite a recent market sell-off, indicators like low unemployment and a high number of job openings continue to suggest that the economy remains strong.

Further, even though countries like Germany and Italy are technically in recession, their unemployment rates are low, and consumption remains stable. This is a mathematical slowdown, but not a massive decline in output. Even if there are two consecutive quarters of negative growth, it’s unlikely to be a global financial crisis scenario.

How do you view India’s growth amid the global economic downturn?

India is right now in a very, very positive spotlight. What international investors are recognizing is the massive improvements in infrastructure that have come to the fore over the last few years. Relative to other large emerging market economies, India’s potential GDP growth rate can really shift quite a bit higher.

From a foreign investor asset allocation perspective, the question is, ‘Do I want to have more India in my portfolio, especially if I’ve had none before?’ This is because the idea for the next 5 to 10 years is that India can move structurally higher on a number of levels. The recent downturn in Indian markets after reaching all-time highs is attributed to profit-taking. The medium-term story for India continues to remain positive.

What is your perception on India’s inclusion in JP Morgan’s Emerging Market Bond index?

The move is a long-term development that would improve market participation. Benchmark-oriented investors will be compelled to buy Indian bonds, enhancing market breadth and liquidity.

Where do you see investment opportunities in India?

From an offshore viewpoint, we are recommending clients consider investment-grade Indian corporate issuers in US dollars. Our main focus on the fixed income side is investment grade credits, predominantly in developed markets; and also as an add-on in investment grade corporate issuers in emerging markets for diversification.

Further we are also considering recommending India-specific exchange traded funds (ETF) to add to the overall India exposure. While India is a relatively small portion of the global stock market, its potential growth makes it an attractive addition to diversified portfolios.

Which are your most preferred markets?

On an international level, our top preferences are still US and Japanese equities. The US equities market has a positive earnings outlook, low beta and lower volatility makes it appealing to cautious investors.

In emerging markets, India has a positive medium-term story with potential GDP growth rate improvements, while China is experiencing a slowdown. So, there is this divergence between the two. And if you’re a growth oriented investor, you will put more money in India than you will in China right now.

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