China stocks at lower valuations but India growth more convincing: Stefan Hofer

Stefan Hofer, chief investment strategist, APAC, LGT Private Bank

Even as persistent issues of widening inflation and steep cost of capital have kept investors worried about performance of equity markets worldwide, Stefan Hofer, chief investment strategist, APAC, LGT Private Bank is confident about India. LGT introduced Indian equities as a standalone overweight recommendation in global investment strategy for the first time in 2023. “This is largely due to the argument that the medium-term outlook for India’s gross domestic product (GDP) growth has moved structurally higher thanks to major infrastructure investments and structural reforms,” he tells Forbes India. He has a positive medium-term growth outlook on India led by major investments in infrastructure and structural reforms, while being cautious on China relative to Indian equities. He explains that Chinese stocks have significantly lower valuations than India’s, but the growth outlook in the latter is more convincing at this stage. Edited excepts from an interview:   

Q. How do you take a call on equities now, with interest rates rising and steep crude price?
Global equities outperformed our expectations in 2023, an environment that saw persistent increases in interest rates and corresponding worries of a US recession taking hold. In the end, the surprising resilience of the US, European and Japanese labour markets supported robust consumption, which, in turn, helped lift growth in advanced economies. For 2024, we anticipate that overall market, interest rate expectation and economic volatility will be higher than 2023, but that, on a full year basis, equities still have room to beat the returns on deposits. As such, at the outset of 2024, we argue that a neutral stance on equities is warranted in a diversified portfolio.   

Q. As sharp bond yields spike made equities volatile and less attractive, to some extent, do you think this trend will continue in 2024 as well?
In our view, the first half of 2024 favours an overweight stance on fixed income relative to stocks, in the sense that bond yields are now ample and US interest rates are set to fall in the middle of the year. Considerable progress has been made on bringing US and European inflation down and we think the traditional 2 percent CPI target is reachable this year.      

Q. Do you think interest rate cuts or at least rate hike pause by Fed in 2024, and if other global central banks follow, will impact cost of capital and subsequently asset classes like bonds and equities?
The US economy grew well above trend rates in 2023 and such high growth is not sustainable, in our opinion. In addition, the cumulative effects of interest rate hikes will likely result in a material growth slowdown in the first half of 2024, but that an outright recession will be avoided.  Our roadmap, therefore, for asset classes is that equity performance may lag fixed income in the first half, but the support of lower rates mid-year sets the stage for an equity rally.   

Q. What are the key economic challenges the world may be facing in 2024?
From a financial markets perspective, a major risk facing investors would be, in our view, a sudden and sharp increase in US core inflation. Arguably, it is an overwhelming consensus view that US inflation will continue to fall, which, in turn, opens the door to interest rate cuts. A surprise change in CPI trends would undermine this outlook, potentially sustained high interest rates for longer causing a material correction in risk assets across the board.   

Q. In terms of allocation, where does India stack up in your portfolio?
With regards to our global investment strategy, in 2023, for the first time. we introduced Indian equities as a standalone overweight recommendation. This is largely due to the argument that the medium-term outlook for India’s gross domestic product (GDP) growth has moved structurally higher thanks to major infrastructure investments and structural reforms.  We continue to highlight the resilience of India’s growth outlook to investors at the outset of 2024.  

Q. Within emerging markets, what are your specific calls for China and India in 2024?
We are cautious on China relative to Indian equities at the outset of 2024.  Chinese stocks have significantly lower valuations than India’s, but the growth outlook in the latter is more convincing at this stage. The ongoing challenges facing the Chinese real estate market may be a drag on growth this year, causing international capital flows to seek out higher growth opportunities elsewhere, such as India. 

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Q. Do you consider weak currency to be a prime deciding factor while you are allocating your funds, especially to emerging markets like India?
The local currency outlook is always an important consideration in the investment decision making process.  For India, we anticipate that 2024 will not see material swings in either direction, owing in part to robust capital inflows and the expectation of moderation in US dollar deprecation given lower interest rates.  On a longer term basis, there are still structural factors that point to a slight depreciation bias for the rupee, namely twin deficits.    

Q. Within sectors, where are you comfortably placed?  
For 2024, we retain our key sector calls that were largely unchanged over the course of 2023.  Namely, these are a combination of technology and innovation sectors, in addition to the more defensive healthcare. Technology delivered sharp outperformance in 2023 but, in our view, this can be substantiated given high level of profits generated by these companies. Healthcare as a sector did not outperform, but, for the first half of 2024, we think investors should maintain an allocation as it can act as a form of “insurance” should economic growth worsen beyond our baseline scenario.   

Q. Which regions are your focus area now?
The US, because it is defensive market. If growth does slow more than expected, or volatility picks up as we expect in the first half of the year, compared with rest of the world, the US market would be less affected.  The US is also a structural growth market with quality companies that adapt relatively quickly.   

Japan is in the midst of a structural change where, for the first time in a long time, there is sustainable inflation.  This is prompting a change in consumer mindset to spend instead of save, boosting economic activity. We have a positive medium-term growth outlook on India led by major investments in infrastructure and structural reforms.