Baig further says, global investors are largely optimistic about India’s growth narrative, though some desire stronger economic performance beyond the current 6% range. While Indian financial markets have been rewarding, expectations are high for accelerated company earnings and sales, especially with anticipated rate cuts and increased liquidity from the RBI potentially fueling loan demand and consumption.
Of late, the world has been dealing with the uncertainty around the US tariff and the implications on economies and businesses, but with the rise of new geopolitical tensions, especially what has really been happening in the Middle East, how do you see the situation escalating and what implications can it have on the world economy, especially crude oil prices?
Taimur Baig: With respect to crude oil prices, there is substantial shock absorption capacity in the world. There is ample supply in the area outside of the one that is under the gun right now, which is the countries in the Strait of Hormuz. Vulnerabilities are substantial. A lot of oil and gas from that region flow into Asia. Asia’s dependence on that part is substantial.
But if you think about Europe or the US, there are plenty of other sources of supply and which is why a lot of the western oil market futures and spot trading action has been fairly muted. So far, the kind of rally that we have seen in oil since Israel started attacking Iran is nothing compared to the historically sharp reaction that the market has had in the past. There are two major reasons for that. One ample supply, even beyond the area in the Middle East and secondly, very muted demand.
We have not seen major spike in demand for gas or oil out of the US, Europe, or China, three big sources of demand in the world and as a result, even if supply were to be somewhat questionable in the near term around some escalation around Strait of Hormuz, that would not cause a major spike in oil. And the final point on oil is that at $75 oil is basically 50% below all-time highs in nominal terms. In real terms, it is like 60% below all-time highs. So, even if oil were to go to $100, $125, we have been there, seen that many times in the past and that is my key point on the Middle East developments and its implication on oil, the shock absorption capacity of the world with respect to somewhat higher oil price is substantial.
While it all sounds reassuring, at least on the oil front, given that we are adequately supplied, what are you making of Trump’s fresh comments coming in overnight where he is saying that Iran will still not be allowed a nuclear weapon? They should have taken that deal and he has also called for an immediate evacuation of everybody in Tehran, and not only US citizens. Do you think this is another major escalation in the making?
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Taimur Baig: There are a lot of things in the fog of war where signals can be misconstrued and lead to disproportionate response from either side. In this particular case, let us hope that that was somewhat of an exaggeration. We are talking about a city of 15 million people. It is just simply not possible to evacuate a city of that size. More importantly, if the Iranian regime feels existential threat, the set of reaction functions that they would entertain would be fundamentally far more adverse for global markets and economies than a tit for tat situation which is grave but not existential. It will honour the status quo as far as who rules Iran.
If we go past that scenario and head into a far more adverse scenario about the Iranian regime’s outright existence, of course, far worse eventualities would have to be entertained. Now, in the context of far worse eventualities, Iraq-Iran fought against each other for eight years in the 1980s. Iraq, when it was withdrawing from Kuwait, set oil field after oil field on fire in the early 1990s and after Operation Desert Storm, neither case led to a major oil shock akin to the kinds of shocks we saw in the 1970s.
This is a critical thing to understand that a single case of supply related disruption cannot cause sustainable pressure on global commodities. It can cause spikes. It can be terrible for sentiments, but overall, the world can handle it. But in the short run, there could be major spikes and uncertainty, no question about that.
I am wondering what the central bank stance is going to be and especially as we have the Fed meeting later. The Fed and the Bank of Japan are the only two central banks out of pretty much every in the world that have been holding fire and have not moved on rates. With so much turmoil in the world, I am wondering whether there will be a change of stance anytime soon?
Taimur Baig: For the Fed to turn very hawkish at a time like this is unlikely. But at the same time, I do not think today’s meeting would lead to some sort of a clear forward guidance about when rate cuts are coming either. The Fed has many uncertainties. What would be the duration of some of these tariffs? Nobody knows. If you do not know, how do you model the direction of goods prices going forward?We have seen expectations worsen substantially, meaning consumers are expecting prices to go higher, but we have not seen that materialise in wage bargaining, in wage demands, or for that matter on companies deciding to pass on substantial prices because people expect high prices anyway. None of those things have happened and we have some data for May and, of course, the full set of data for April already to get a sense of the early impact on tariff, pretty muted.
But at the same time, the Fed has to be forward-looking. Just because we have not seen a manifestation of higher prices does not mean we would not. And if indeed on the margin, oil goes up as opposed to down, that adds to Fed’s concern about price stability. So, the Fed is in a very tricky position. It would have to be very clear to the market that the uncertainties around right now make it stay on that wait and see mode.
If in the next couple of months the economy shows some additional signs of weakness, prices do not jump the way we had feared a few months ago, trade related deals or postponements happen, then the Fed can start getting in the business of cutting rates at least twice this year, that is our forecast. The market, having been very dovish, has more or less worked around that forecast as well. Let us see. I am still holding on to that forecast.
What is your view on India’s macro positioning versus the other emerging markets because for India, we are in the rate cut cycle, the inflation seems to be cooling off and the other lead indicators are holding up well as well. Does it still hold the long India narrative globally?
Taimur Baig: It seems very clear that the long India narrative is there. There is some degree of impatience from global investors. They probably want even stronger growth-related outturns in India. Financial markets have been very rewarding nonetheless.
But at some point, you want that 7-8% growth trajectory to materialise not the sixes and at the same time even beyond the topline growth numbers, company related earnings, company margins, overall data on sales, all those things are expected to accelerate going forward, especially if the rate cuts that everybody is expecting materialise and the RBI in addition to cutting rates adds lots of liquidity to the system creates a loan cycle and around that, we can see a virtuous set of loan demand, consumption, sales, and farm level profitability.
All of that together lifts growth past the 6% range. India remains very much favourably seen by global investors, no question about it. Asset allocators look at India before just about anything else when they think of Asia. But valuation wise there are, of course, question marks. It is a very frothy market. If you look at valuations elsewhere in Asia and particularly in China, there are, of course, just from a valuation perspective better buys to be had.
What are you making of the trade deals that we are hearing getting signed at the G7? We understand that the US and UK have signed a trade deal although we do not know the details of that. The US also claims that they have reached a truce with China as well. What do you make of these trade deals? How is it going to impact global trade volumes and where does India stand amid all of this?
Taimur Baig: I will parse semantics a bit which is deal versus an agreement. When we talk about the free trade agreement between say India and the UK or the things that my country Singapore has signed with many countries in the world over the years, we are talking about hundreds of pages worth of a technical document, product by product discussion, very detailed commerce department official versus commerce department official sort of agreement.
We are not talking about any of that stuff when we talk about trade deals between the US and UK or whatever is happening between the US and Japan. These are very high level discussions. Many details will remain unworked even if these deals are announced. My view is that beyond high level discussions on one promising to buy so much from the other, and promising to invest so much in the other, we would not really see too much teeth in that.
The US simply does not have the bandwidth to go ahead and start signing detailed trade agreements with country after country in the world. If you look at the history of trade agreements, those things take years. Even the implementation takes multiple years. Donald Trump does not have the time or bandwidth for any of that. He wants some headline pleasing developments where it shows that the US is forcing countries to buy more from the US and perhaps sell less to the US and invest more in the US. He will get some of those things, but I do not think that will fundamentally change the US’ issue, which is it runs a very large savings investment imbalance and for that, it needs to import a lot of stuff. It needs the rest of the world’s financing, that is not changing.
