Not All Western Recessions Are Bad For India, Other EMs, Pankaj Murarka Says
A recession in a deflationary environment is different from when it happens in an inflationary phase, says Murarka
The growing consensus over a likely recession in the western world may not be as bad for India and other emerging markets, according to Pankaj Murarka of Renaissance Investment Managers Pvt.
A recession in a deflationary environment is different from when it happens in an inflationary phase, Murarka, chief investment officer at Renaissance, told BQ Prime's Niraj Shah in an interview. “While the world will be in recession, India may still deliver 6.5% of growth next year.”
Earnings contraction is inevitable in the deflationary environment, he said. "This is when we see a sharp correction in developed equity markets like those of the U.S. and Europe."
However, considering the current inflationary situation, there is a high probability that, despite a recession in the developed world, earnings will grow in the emerging markets, according to Murarka.
“This is because a 2-3% contraction in real growth during the recession, along with high inflation, will translate into earnings growth in developed markets," he said. "That is why we are not bearish on developed markets as well, because my view is that most of these markets have made their recessionary lows during this year."
Watch the full interview here:
The Fund Flow Picture
Another factor aiding the resilience of the Indian markets next year would be the U.S. Federal Reserve Bank’s decision on smaller rate hikes.
Globally, there will be a significant amount of capital that will flow back to emerging markets next year, and India will be a big beneficiary of that, according to Murarka.
“A significant number of active investors and large sovereign wealth funds, managing more than $20 billion to $50 billion with zero or negligible exposure to India, are wanting to invest in the country," he said.
While a significant amount of passive flow will come to India, Murarka reckons that active managers will follow.
An increase in India's weight in the MSCI Emerging Markets Index from the pre-Covid levels of 8% to nearly 16% will result in India getting double the share of the dollar that is allocated globally to emerging markets, he said.
Top Sectoral Bets
Renaissance is “very bullish” on capital goods as a sector because "it is still early days for India's investment cycle", he said. “We are bullish on India's manufacturing ecosystem around chemicals and electronics. Industrial Revolution 3.0 will lead the manufacturing companies to automate and digitise their shop floors.”
He also expects India's internet economy to expand at a “compounded annual growth rate of over 20% in the next 7-8 years".