Why is consumption preferred over capex in current market conditions? JPMorgan's Rajiv Batra explains

Rajiv Batra, Head of Asia & Co-Head of Global Emerging Markets Equity Strategy, Chief India & ASEAN Equity Strategist, JPMorgan, says amidst a global growth slowdown led by the US, the focus shifts towards domestic demand in India and other Asian emerging markets. Their investment strategy favours consumption over capital expenditure, driven by fiscal policies supporting consumption. Consequently, the portfolio is overweight on financials, consumer staples, discretionary (excluding auto), healthcare, power, defence, and real estate while being underweight on IT, pharma, and auto.

Do you think that the proposed GST rationalisation along with the US tariff uncertainty are all baked into the price rise in the markets right now, especially the GST rationalisation good news?
Rajiv Batra: It is a mixed pack because you are presenting me with both tailwind and headwind at the same point of time where we have good news in the form of GST rationalisation and the most awaited fiscal support we were waiting for is finally arriving. But at the same point of time, tariff uncertainty is still remaining in place overall. It is a mixed feeling which the market is going through and hence despite having a plethora of good positive macro data coming out during market hours yesterday, the overall index did not move up much. Why? Because the market is still under stress, what is going to happen on August 27th.

Whether the 50% tariff is going to become a reality or not, looking at the market’s absolute performance year to date and most importantly relative to the rest of Asia and emerging market peers, where India is lagging close to 25% for the last one year, is discounting most of the negativity. Near-term, there could be markets worrying about the volatility and geopolitical uncertainty, but from a medium and long-term perspective, fundamentals will prevail and hence corporate earnings and GDP growth of the country will be of paramount importance. If that starts coming back on the picture, then I don’t think we should worry too much about the tariff uncertainty for India.

But in the interim, the market is in a little bit of a confused tug of war situation. Do you think the headwind impact is bigger than the tailwind fillip that is purely domestic in nature?
Rajiv Batra: Look at the headwind impact. If you take into account this tariff, it could be in the range of around 40 to 80 bps to GDP overall, but it also has to take into account whether those tariffs remain in place for the entire year or for the longer-term horizon.

The big question mark is if within the next two or three months, it starts rolling back and the numbers start going lower and at the same point of time, you also start getting the same amount or bigger tailwind coming from this GST cut side. As an example, if 25% tariff today is a reality which is a 40 basis point drag on GDP growth, on the same side, if GST rationalisation is giving a 60 basis point boost over there, if this 40 basis point headwind moves away in three months’ time and only 60 basis point remain, then net accretion on GDP growth could be 100 basis points.

Now, is the market discounting that? No, the market is not discounting that. The market is not even pricing in that there is a net positive impact even of a 20 basis point. We are currently focusing too much on that 40 basis point or 80 basis point downside impact rather than thinking what the tailwind could provide and this is not something new with India. Over the last two to three decades, we have seen that whenever the geopolitical uncertainty approaches, we start forgetting about the fundamentals and quality of the market. Our job as a market participant will be to bring people towards the neutral line rather than taking them to the extremes.

But as an investor one has to be prepared for the extremes too while the market itself is pretty neutral for the longest time. But while at an index level we are only about 1,000-1,300 odd points away from that all-time peak which we clocked in September last year. Assuming the worst case scenario is 50% tariff by month-end and it continues to be a drag, there is no resolution for some more time. What is the worst-case and what is the best-case scenario for the index should the positivity from GST rationalisation begin to kick in during the festive season?
Rajiv Batra: Looking at the recent reactions from market headlines over there, we have been receiving a lot of headlines over the past few days where comments have been made about Russian oil imports coming from the US policy makers or people watching how the peace treaty is going through between Russia and Ukraine.

But the reaction from the Indian equity market has been fairly muted. It has not celebrated the positive news also but at the same time, it is not going down significantly when the worrisome news is hitting it. On the D-day, if this particular news comes, it will be interesting to watch the entire day’s action, like what you start with as a downside when that 50% tariff is hitting and how you close that particular day. We have to appreciate that the Indian domestic investor is becoming quite smarter. They are using this kind of an opportunity to get more into the quality kind of a name. Taking that into account, it will be a higher volatility event, but will it become a base case for a three, five, ten years perspective for most of the investors pitchbook.

Which sectors do you believe can participate in the rally going ahead? Will you make any changes to your 30,000 bull case target for Nifty? I do not think there are any changes made for now, but which sectors will participate the most because you have been bullish on autos, hospitals, and defence. Has anything else been added into the list?
Rajiv Batra: No, looking at the overarching theme for this year and going into next year, even if the US is not slipping into recession, global growth slowdown is upon us which is largely coming from the US where JPMorgan expects this year’s GDP growth for the US forecast to be in the range of around 1.6% and 1.5% next year, significantly below the potential growth mark of around 2.5-3%.

Taking that into account, we will need to be deploying more into the domestic demand for India as well as other emerging markets in Asia and try to be a bit cautiously optimistic on exporters. So, domestic demand over exporters is our broad-based theme which we are following in our allocation. Within that, for India the preference is consumption over capex. This is a theme we have been pushing since February this year when we saw slowly and steadily that the country was pivoting towards supporting more consumption that has been the weakest spot for the country for the last five years or so. We saw fiscal subsidies being given that followed with the tax rate cut for the middle class and now potential GST normalisation which we are talking about. So that pivot is going to help consumption.

Taking that into account, my sectoral allocation is precisely in line with that where we are overweight on financials, consumer staples, discretionary except auto. We are overweight on healthcare, hospitals, and power and defence. We are underweight on the IT, pharma, and auto sectors. Recently we even upgraded materials to overweight, but on the export side, IT and pharma are the key concerns for us.

I also could not help but notice real estate is one of the sectors that you like, mentioned in your latest India strategy note. Give us a sense of what you are seeing when it comes to that sector because we are getting mixed updates from developers on ground wherein some are saying that demand looks intact, some are saying it is only luxury demand that is intact and affordable is in the trenches. How are you positioned when it comes to this sector?
Rajiv Batra: In the case of real estate sector, after a great performance which we have seen for the past three to four years in a row, post this kind of excessive monetary policy tightening along with the balance sheet size reduction from RBI where balance sheet growth was 4% and country's nominal growth was 11%, real estate sector was bound to get slowed down, tapered, or the mixed kind of a commentary which you are hearing it is a reality after that kind of a tightening.

But taking today into account a 100 basis point of repo cut, 150 basis points of CRR cut, the policy is tilted more toward an easing overdrive. Taking that into account, the mixed feeling or sentiment which you are getting in real estate gives a quarter or two before you start getting even the positive commentary out. We have seen in the past that whenever mortgage rates start hitting a seven handle, that usually is like an inflection point for demand for mortgage loans coming and good for the real estate sector also. We remain hopeful and optimistic and festive season or demand season is upon us with rates being lower like your durable sectors and stuff, even the real estate sector will tend to benefit. This is a reason we remain overweight on real estate space.