emerging markets: Weaker dollar and emerging market flows support a bullish case for India: Matt Orton

“What companies are doing now is we have kind of gone through all of the inventories they had already stocked up, but companies are taking advantage of this pause to manage and restock some inventories in advance of some of these tariffs or what might be negotiation up and down with respect to where the rates ultimately fall,” says Matt Orton, Raymond James Investment.

In general, the view is tariff impact would be felt in the second half of this calendar year, which is that is the time you will actually start seeing the effect of the tariff. Right now, it is a sugar rush because everybody in a sense consumed more or loaded more ahead of tariff. Is that a real risk?
Matt Orton: There is definitely a risk, but when you are looking at tariffs now, so you had this 90-day reprieve, July 9th, is the day at which we need to have some sort of trade deals put in place. So, what companies are doing now is we have kind of gone through all of the inventories they had already stocked up, but companies are taking advantage of this pause to manage and restock some inventories in advance of some of these tariffs or what might be negotiation up and down with respect to where the rates ultimately fall.

But at the end of the day, the American consumer can bear some of that weight. Corporate margins are close to record highs right now. Those margins can compress a little bit to eat perhaps some of what those tariffs might look like. So, a lot of it can be taken on by the overall economy. The economy is definitely going to slow, but I think that was a base case heading into this year.

We were running at an above trend rate for a long time. So, my expectation even absent tariffs was that we were going to see a slowdown. But the key is that we have avoided recession, with the walk back with respect to tariff policy, all of those scenarios are off the table and that is good enough to support growth, nominal GDP growth, that can support earnings.

But coming back to India, we do have a historical trend which in a sense has endorsed that every time when there is a little bit of problem in the developed market and when there is weakness in the currency, which is dollar index, flows they come back to into emerging markets. Will the script play out again?
Matt Orton: So, you are already seeing that. So, weaker dollar has certainly benefited emerging markets and you have seen flows move into emerging markets from the US in particular. There is a case for US dollar to remain weak for the rest of this year especially as you see tariffs start to take effect. So, you will have the interplay of a persistently weaker dollar to help emerging markets, I think that supports the overall economy and if you have commodity prices, especially oil, that is fairly well supplied around the rest of the world, that again provides a support for growth in a market like India. So, there is a lot of longer-term supportive tailwinds to make the more bullish case for India absent all of the global uncertainty that might be around.

So, other than infra, any other opportunities you are scouting for when it comes to India? Where is it that you have your largest exposure here sectorally?
Matt Orton: So, one of my longer-term holdings is in one of the most successful holdings we have had, has been ICICI Bank, that has just been a compelling investment. I like the story with respect to growth, net interest margins, and also the private banking side as well that continues to grow. It is leveraged to a lot of the long-term growth themes in India. So, that has been a really exciting opportunity and it still looks very attractive despite the gains so far this year.
In general, the belief is that global investors do not like PSUs, government-dominated stocks. Is that true for you as well?
Matt Orton: It is true. So, that is one of the reasons I do not like China as a long-term investment is, there is still a lot of state-owned enterprises and plus then you have on top of that the risk of what the central government is going to do. You do not have that in India where there is not a dictator who rules the country and sets what companies can or cannot do and state-owned enterprises are just less efficient inherently. So, when you look at like SBI versus an ICICI Bank, there is a clear difference with respect to where loan growth is going, asset quality credit mix. So, again, the private banking side at least right now is still a much more attractive place to be.