As we look into the crystal ball to forecast our investment thesis for the financial year ahead the belief is that the macro narrative for the environment will be dominated by the following major themes: 1) Monetary policy of the United States Federal Reserve 2) Risk of escalation of the war in the Middle East 3) Macro environment in India Starting with the United States, The US economy continues to outperform, with 2023 growth well above potential and significant momentum carrying it through the first quarter of 2024. The labour market especially has exceeded expectations, with the rate of job gains far above most estimates of long-run equilibrium. With growth so strong, the path back to the Fed’s 2.0% inflation target has been bumpy: progress was faster in the fourth quarter (4Q) of 2023 and slower in the first quarter (1Q) of this year. We expect the back-andforth to continue. While the destination remains 2.0%, the path will remain nonlinear. That makes the case for slower rate cuts in the US than elsewhere—the likely scenario. Our scepticism about the early start to rate cuts this year was validated by 1Q data, but that doesn’t mean rate cuts won’t come eventually— only that investors will need to be patient. Financial markets are likely to remain unusually volatile while trying to guess which month will see the first easing.
In early April, an escalation of the Israel Hamas conflict seemed inevitable with Iran also entering the picture through direct drone launches towards major Israeli cities and Israel’s possible retaliation, however tensions between Israel and Iran have since cooled down and so has the threat of a direct military conflict between the two. Stability in the region is important because of the world’s dependence on Oil, any major price fluctuations will be damaging to long term growth prospects of two major oil importing countries, India and China. Indian macros continue to track impressive numbers with GST collections for April coming a Rs 2.1 lakh crore, the highest ever. January-March quarter GDP numbers are expected to be in the 8% range along with strong manufacturing and services PMI numbers at 59 & 61 respectively for March 2024. All in all, the above numbers point to a strong economic and investment outlook continuing in India for the current financial year, the near term risk to this would be the outcome of the ongoing general elections, anything other than a complete majority for the incumbent government could raise some question marks on the consistency of economic and monetary policy going forward.
Where do we see the opportunities ahead:
At Eraya Capital our major focus will continue to be on India and we believe it still offers favourable risk reward from a long term perspective, over the short term we will continue to make opportunistic bets in other markets, be it to play the valuation game in China or to take advantage of the change in monetary policies of the US Fed which would throw up opportunities to make outsized returns for US government treasury papers