Keynote Address – Investing in the New ‘New Normal’

The second session of the conference was an insightful and engaging dialogue that addressed both the global macroeconomic environment and the opportunities that lie ahead for India in a new normal resulting from a prolonged pandemic and the policy actions that followed.

The discussion started with a reflection on what we have learned over the past two years since the onset of the pandemic. Referring to the present situation as a New ‘New Normal’, Navneet Munot, CFA, MD & CEO, HDFC AMC Ltd expressed an appreciation for the resilience and resolve of mankind for having demonstrated not only learning from the crisis but emerging stronger from it. He very aptly quoted Lenin with the words, “There are decades when nothing happens, and there are weeks where decades happen,” in the context of how confusion and volatility manifested in the markets in the form of multi-year lows followed by all-time highs. Navneet also touched upon the social crisis, geopolitical crisis, and climate crisis that the world has witnessed in the past couple of years. The message of the CFA Society India about finance as being instrumental for the ultimate good of mankind was reiterated by him.

The session then proceeded towards addressing the problem of inflation and whether we are headed towards a recession. How could the events happening in the United States impact India, especially given that over the past two decades, a lot of crises have emerged in the US? Navneet defined the world we are living in as being unpredictable, faster, and questionable. The markets are currently discussing the three ‘R’s namely Rates, Recession, and Russia. Navneet opined that while central banks have largely resorted to monetary policy tools such as quantitative easing and forward guidance in response to crises in the last four decades, such prolonged policy support could be coming to an end. Since the discount rate is a major determinant in the process of valuation, there could be serious repercussions on the way we price assets. He pointed out the following as being very positive for India which is one of the fastest growing major economies:

• Technical recession in the US
• Possible challenges to European growth in the coming quarters
• Slowdown in China

The next part of the discussion focused specifically on the issue of supply chain disruption and the existence of a multi-polar world, and where India stands in the context of these developments. Navneet took this question by highlighting the presence of demographic dividends in India, Africa, and parts of Latin America. Speaking of ‘globalization of localization’ as against the end of globalization, he discussed how supply chains need to be shifted in large part to Asia where consumption is expected to increase substantially over the next several decades. He also touched upon the need for organizations to outsource their production to regions with rich demographic dividends. Navneet then shifted the focus to the sweet spot India is in, by reiterating the ‘purposeful capitalism’ or ‘capitalism with a conscience’ that the democratic nation has historically demonstrated. He pointed to the fact that India will be leading the G-20 summit next year and made a case for India taking the lead in tackling challenges such as climate change that the world is currently facing.

The session then proceeded to an evaluation of whether an investor investing in India can derive massive investment success, like what Warren Buffett achieved by staying invested in the US since the late twenties. Navneet demonstrated how India ticks all the three boxes required for a developing or frontier nation to move to developed status:

Rule of Law:
The right reforms carried out for long have resulted in property rights, the willingness of people to work hard, a growing number of unicorns, ease of doing business, and ease of living.

Education and Innovation:
Digital technology has allowed us to leapfrog in this objective.

Strong Social Security Net:
The basic necessities of millions of people have been taken care of, which has enabled them to start thinking in terms of tomorrow.

A discussion on the present shape of the Indian economy and the likely outcome for the medium-term was taken up next. Navneet started this discussion by listing the four powerful forces in favor of India today, namely, Democracy, Demand, Demographics, and Digitization. While he recognized that a global recession could impact our export growth, he presented a view that factors such as the PLI scheme, and the shifting and realigning of supply chains will work out in India’s favor over the medium term. Balance sheets of corporates and the banking sector have gotten repaired during the period. Speaking of the balance sheet of the government, he pointed out that while the debt-to-GDP ratio has grown and the fiscal deficit widened, the government has been focused on fiscal prudence. He discussed the strategic advantage possessed by India in terms of a framework to arrive at the view of the markets as follows:

• Macroeconomic Factors: Domestic macroeconomic factors appear strong for India
• Corporate Profits: A new cycle of corporate profitability has started
• Valuations: Valuations for India have become more reasonable
• Liquidity/Sentiment: Financialization of savings enables participation by domestic investors

Navneet discussed how a combination of financial leverage, Robo leverage, and social media leverage has moved markets in recent times. He suggested that going forward, portfolio construction and asset allocation will matter a lot.

Towards the end of the session, Navneet expressed his views on the idea of ‘new-age investor’. He acknowledged that investors today are more informed, intrigued, and interactive. However, he shifted the focus to the basic tenets of investing namely:

• Setting Investment Objectives
• Arriving at Asset Allocation
• Ensuring Portfolio Diversification and Rebalancing

The last of the session was a Q&A round with the audience bringing up questions on various topics such as the sustainable growth of India, the commodities super-cycle, and the likely impact on a traditional 60/40 portfolio given the current macroeconomic environment.