Dr. Jim Walker at IIFL conference: Bullish call on India continues with intermission for elections

14 Feb 2024 , 12:34 PM

Dr. Jim Walker, Chief Economist at Aletheia Capital, made the opening speech at IIFL Securities annual Enterprising Bharat Global Investor Conference. 

Highlights: 

On slower global growth and US recession: Dr. Walker sees 2024 growth globally to be weaker than 2023. US is forecasted to grow at 1.6% vs 2.5% in 2023. Japan forecasts 0.9% growth against 2.0% in 2023. Eurozone growth pegged at 0.7%. Global average growth forecast is 2.4% vs 2.6% in 2023. With growth of major economies predicted at levels lower than global average, growth has to be driven by EM like India. However, many EMs score poorly on Dr. Walker’s business cycle index, worse even than DMs, and India is perched comfortably at the top. Keeping in view the current global scenario, India presents an exciting opportunity.

 All is not well in the US: 

Dr. Walker believes that while everything seems to be ‘fine’ in the US on the outside, the real picture is not encouraging. Economy is growing but is mainly driven by government spending. Debt/GDP is at 120% which is worrying. Fiscal deficit is high in a boom phase, leaving no room for a countercyclical stimulus. Incrementally, growth can’t be sustained unless government is willing to widen its deficit and debt levels drastically. There is no pressure on Fed to cut rates as economy is doing well. For rate cuts to happen, one should pray for an economic slowdown in the US. 

India favourable macro: 

In Dr. Walker’s opinion, India is the only country in the region that can see a full-blown business cycle upturn. India’s fiscal deficit is well under control at 5.1% in FY24 and target of 4.5% in FY25. Similarly, debt/GDP is also comfortable at around 80%. Indian Rupee has been strong until now and is expected to remain strong going forward. Dr. Walker also suggests that we should see CAD together with FDI, because when FDI happens, companies import equipment that registers as CAD but pay for it with FDI that neutralises part of the CAD. On looking CAD and FDI as a whole, India is in a surplus position. 

The promising India investment story: 

Investment is the growth driver for an economy, consumption is the end result, says Dr. Walker. There are 5 conditions which should be favourable to boost investments – ROE, Real lending rate, Bank Credit Relative, Investment Relative, and Broad Money Supply. He combines this into a business cycle index (fig 3). India scores the highest (3) out of all the Asian countries, while Thailand is the worst (-4).

Growth prospects: Only 3 countries grew in 2023 at a rate higher than the average growth rate pre-COVID (2015-19) – India, Japan and HKsee fig 3. Japan grew faster because its imports fell, which shows that economy is weak rather than strong. HK grew faster because of reopening of its economy in Q1. In rest 3 quarters, growth infact slowed down. So, the overall GDP growth rate of 3.3% in HK is driven by Q1 only, and is misleading. 

Cyclical signals strongly positive in India: 

Indian corporate profitability is going up. Investment cycle upturn has just begun and is supported by the banking system. Equity valuations are high but it is not a cause of worry as earnings are rising. Long the Sensex is the strategy. Criticism that profitability in India is driven by cost cutting rather than growth in topline is pointless as whenever investment cycle turns, companies prepare themselves in this manner only. During 2013 to COVID, investment cycle saw a downturn as banking system was not supportive enough. Lending was slow due to rising NPAs. However, things are changing for the better. Non-food credit has witnessed its fastest growth since 2012. Also, credit demand is strong. Dr. Walker is bullish on India seeing a strong capex cycle. 

Did China learn a lesson from past: 

Dr. Walker has an interesting take on China. He reminds us that China saved the world from the GFC of 2008-09. It spent heavily, which led to overcapacity building up and debt shooting up. Xi Jinping is still trying to solve that problem from the last 10 years. The US expects China to repeat the same mistake again. It wants China to give a huge economic stimulus. But China has learnt its lesson from the past and hence, being very conservative with economic stimulus. Dr. Walker believes that China’s momentum is weak, though not worst. ROE of companies is still lower than pre-COVID levels and lags India by a margin. Lending rate is moving closer to zero which is a great policy move as it ensures strong investment discipline. In the past, real rates were negative which led to irrational investments. However, consumer confidence is much lower and the reopening of economy post COVID did little to boost it up. Property sector has collapsed. 2024 is not expected to be good for China, no huge stimulus is expected, though exports should continue. Most of the money from China has moved to Japan, which is a terrible mistake as Japan is a currency bet rather than a country bet. Dr. Walker’s believes that Xi Jinping is very popular in China as he came to power on anti-corruption stance. Real estate trouble in China is all due to anti-corruption drive as involved officials were feathering their wallets. Xi might probably retire after another term and there is good succession back up thereafter. 

What’s happening with Japan: 

Dr. Walker believes that Japan is uninvestible. Profits of Japanese companies are predominantly generated by investing in other countries like China, India, Taiwan, etc. As long as the Yen keeps falling, Japanese markets will do good but if Japan sees too much investment inflows, the Yen will strengthen and returns will worsen. So flight of capital from China to Japan is a mistake. 

HK woes: 

Dr. Walker sees in deep trouble. Retail sales (in value and volume) are below 2019 levels. ROE are much below COVID and private credit as a % of GDP is rising. HK consumers are spending money in China and tourists are finding the place very expensive. Also, Korea, Hong Kong and Thailand are close to or in recession.