When Will The Fed Cut Rates? | The Portfolio Manager | NDTV Profit - video Dailymotion

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- Have markets priced in geopolitical risks? - What are the best bets in a recession scenario?   Niraj Shah speaks to Fidelity International's Salman Ahmed on 'The  Portfolio Manager'. #NDTVProfitLive  ______________________________________________________   For more videos subscribe to our channel: https://www.youtube.com/@NDTVProfitIndia Visit NDTV Profit for more news: https://www.ndtvprofit.com/ Don't enter the stock market unaware. Read all Research Reports here: https://www.ndtvprofit.com/research-reports Follow NDTV Profit here Twitter: https://twitter.com/NDTVProfitIndia , https://twitter.com/NDTVProfit LinkedIn: https://www.linkedin.com/company/ndtvprofit Instagram: https://www.instagram.com/ndtvprofit/ #ndtvprofit #stockmarket #news #ndtv #business #finance #mutualfunds #sharemarket Share Market News | NDTV Profit LIVE | NDTV Profit LIVE News | Business News LIVE | Finance News | Mutual Funds | Stocks To Buy | Stock Market LIVE News | Stock Market Latest Updates | Sensex Nifty LIVE | Nifty Sensex LIVE

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00:00 Thanks for tuning into Worldview.

00:22 I'm your host, Neeraj Shah.

00:24 Our guest today is the Global Head of Macro and Strategic Asset Allocation at Fidelity

00:28 International.

00:30 And his note on Outlook 2024, he writes that the base case for 2024 is a cyclical recession.

00:38 Amongst other things, one of the more important things to my mind that he's writing is that

00:43 while the other factors have been accounted, this is not his writing, but I'm saying that

00:46 while the other factors have been accounted, his view on how there is going to be a likely

00:51 pickup in refinancing needs at a time of credit tightening across the board is something that

00:57 might be all pervasive for all corporations across the world.

01:00 Let me welcome in on the show, Salman Ahmed.

01:03 Thank you so much for taking the time out and being with us.

01:06 Thank you, Neeraj.

01:07 Thank you for having me.

01:08 Pleasure is entirely ours.

01:09 Salman, so let's start with this particular aspect and that's the, I mean, on Worldview.

01:16 And what is your base case?

01:18 Because you're not present for scenarios, but I would like to start with the base view.

01:23 Sure.

01:24 So basically, we're thinking as we go into 2024, and in fact, now we are in 2024 over

01:30 the last few days.

01:32 So we think that ultimately the end of the cycle will be a cyclical recession.

01:38 But the path to get to that cyclical recession passes through soft landing, which is the

01:41 regime we are in right now.

01:43 In fact, the Fed's signal pivot, if you will, in December was a big step in that direction

01:51 where they started embracing the soft landing narrative itself.

01:56 But we think that this regime of soft landing will take time to dissipate, but ultimately

02:02 it will go into a cyclical recession, especially for the US economy, as you rightly mentioned,

02:09 as refinancing has come through, because they have been quite subdued in 2023.

02:13 So soft landing now and then cyclical recession later is our base case.

02:20 A bit of the Fed first before I get to the economic implications thereof.

02:25 Did you make too much of the minutes that got released recently wherein, and you know,

02:30 Fed officials often do what they do best, which is confuse people, because the comments

02:35 are all over the place.

02:36 They are very conflicting in nature.

02:39 And what happens in the meeting at times gives a slightly different impression from what

02:45 the minutes might show as well.

02:47 So are you of the belief that the base case that the market has or the dot plot is showing

02:52 is what the turnout will be?

02:54 And do you have a sense of when the Fed easing starts off?

02:58 Is it earlier in the year?

02:59 Is it later in the year?

03:00 Is it difficult to say?

03:02 So I completely, firstly, agree that they are good at creating confusion into the markets.

03:08 And if you look at the forecasting record of the dot plot, because the dot plot moves

03:12 around a lot itself, is not that great.

03:15 But where the dot plot is important is that it gives, starts to give a signal about the

03:22 Fed's reaction function.

03:23 So the reaction function is basically based on the meeting.

03:27 And then obviously, the minutes are a bit, you know, reeling back some of the dimension

03:32 which came out, is that we will change their stance, you know, well before inflation reaches

03:39 2%, their 2% target.

03:41 So that's something which I think is the most important message from it.

03:46 But yes, there is noise around that, that message you mentioned.

03:50 So our thinking is that we don't cut in March because as they are signaling this dovishness,

03:57 you know, financial conditions are easing so that in the short term may strengthen the

04:01 data.

04:02 So they may have to go later, but may have to go more dramatically because of this refinancing,

04:09 because of the lag effect of tightening and monetary policy.

04:13 So we are not in the March camp.

04:15 We think that March is too soon and we think they will reel back from that initial thinking

04:19 which came through.

04:20 But ultimately, they will pivot and they will cut once they see signs of weakness in growth,

04:26 especially.

04:27 Got it.

04:28 So how do, okay, how do asset classes react to this possibility of soft landing first?

04:35 And maybe they come to a realization that eventually it's a cyclical recession.

04:39 But since they have to cross the soft landing patch first, how do you think asset classes

04:43 both on the fixed income side as well as the equity side react to the soft landing scenario

04:50 that it unfolds, whether it unfolds in the first half or sometime early second half?

04:55 So we saw in December a very big rally in everything.

04:58 So bonds rallied, equities rallied.

05:00 So that's where you see the soft landing narrative being priced in very quickly.

05:05 We have seen some reversals to that at the start of the year.

05:09 I think that's more to do with positioning and technical correction and liquidity is

05:13 being low as well.

05:14 But that's the kind of environment where you see basically equities being supportive and

05:18 bonds being supported as well.

05:22 So we think that can continue, although December rally was very strong and it happened very,

05:26 very quickly.

05:27 You may see, as I mentioned, some corrections around that.

05:31 But ultimately, we think that equities can become more richer.

05:35 And then once that valuation become completely disconnected, where the path of the economy

05:40 is, that's where I think the vulnerability starts to take place.

05:44 But right now, it's much more to do with positioning and technicals after a very strong rally,

05:48 which was led by the soft landing narrative we saw in December.

05:51 So NetNet Salman, for what you are saying also is that much of what we saw post the

05:58 COVID laws of 2020, which is central banking action and central banking tones driving what

06:05 risk assets do, that continues well into 2024.

06:09 There might be a disconnect between what the economy is doing, but the risk assets will

06:13 effectively move to the tune or the march of what the Fed and the other central bankers

06:18 are saying and doing.

06:20 I completely agree with that assessment.

06:23 And that's what we calibrate in our policy responses to these different scenarios.

06:29 And we saw that in December, how the market latched on to the Fed's supposed pivot.

06:36 So 2024 is another year where policy is going to be very important.

06:39 We have elections, of course, and later in the US, especially in November, that's going

06:46 to increase the political noise.

06:49 Policy is going to be again, come under a lot of scrutiny.

06:52 So this is going to be a year of politics and policy.

06:55 So the two Ps are going to be very important for markets.

06:59 Got it.

07:00 There is also this growing permanence of geopolitics in our lives, whether we like it or not.

07:05 I mean, 2022 was one conflict, 2023 is two, God forbid, but 2024 might even see three

07:14 if South China Sea or a larger conflict within the Middle Eastern region as well because

07:20 of the Israel-Hamas war, maybe broadening out as well.

07:24 Do these demand enhanced risk premia to themselves and therefore, do they have the wherewithal

07:30 to bring down, not as a flash in the pan move, but maybe a slightly longer cyclical move

07:38 impact on risk assets?

07:40 Or do you think markets are now digesting these conflicts very well?

07:44 So markets do struggle to price in the probabilities of these geopolitical events.

07:50 Usually they are traded as you noted as episodes.

07:55 So they're very episodic in terms of their reaction.

08:00 But these conflicts are ongoing.

08:03 And then some of these two, the two main wars you mentioned are hot wars.

08:06 So we have been looking at commodities oil, we thought, you know, felt quite a lot more

08:11 than the fundamentals and the risk of, you know, especially the issues in the Middle

08:16 East.

08:17 They were not clearly pricing that in.

08:18 So there is obviously a role for energy here, because that's the most important barometer,

08:24 especially in what's happening in the Middle East and even in Russia and Ukraine.

08:28 So we are putting these hedges where we see value.

08:32 But to your point, it is very difficult for public traded markets to price in, you know,

08:38 clear cut risk premiums.

08:40 What happens to the big joker in the pack, which is commodities and oil now, crude, to

08:45 many is a deep insider of what conflicts might suggest.

08:50 And much like, much to the contrary to what people would have thought would happen to

08:55 crude prices, given the geopolitical conflicts that we had, 2023 has been a lame year of

09:02 sorts, fairly flatline performance, even if there was volatility through the year.

09:08 Is there a sense of something that you are building in when you are building out your

09:12 models of what could happen to different risk assets, about what crude will do and its impact

09:17 thereof in 2024?

09:19 Sure.

09:20 So the transmission channel of energy to the macro economy is through spike risk.

09:25 Obviously the spike risk, if the conflict widens, as you mentioned, although that's

09:30 not a base case, but we are keeping a very close eye given what's happened over the last

09:34 few days as well, is that then oil has to remain high for longer for that inflation

09:40 to start getting affected.

09:42 And then, of course, it acts as a tax on the consumer.

09:46 So the sustainability of the move is also very important.

09:49 So at this stage, I think it's more about portfolio hedges.

09:52 But if it becomes a macro factor, that means the conflict has to become much more deeper

09:58 and spread much wider, which is obviously within the realms of possibility.

10:02 And that's where you get structural supply issues coming into crude.

10:07 Salman, before we take that break, one question.

10:09 Now I'm drawing the attention back to the note and then we'll, of course, I would love

10:13 to talk about some of the other points that you made on the note.

10:15 But you know, HITR2 in India and maybe across the world, you would have a better sense there.

10:21 The last two, three years, a lot of companies were able to shore up margins and earnings

10:26 growth because of factors which were internal in nature in the control.

10:30 2024 somehow seems to be a year or the start of a period wherein a lot of impact on the

10:36 companies, on various corporations, operational metrics would not be something which is within

10:41 their control, but global in nature, macro in nature, so on and so forth.

10:45 You made this point that there's this refinancing piece which will come out as well, which will

10:49 also have a bearing for a lot of corporations as well.

10:52 How high is the risk of earnings growth looking very, very wobbly in a period wherein there

11:02 is faltering of growth in various economies, maybe Europe, maybe China and some others,

11:07 maybe US growth coming off, plus refinancing, plus the fact macro is a lot more uncertain

11:13 in 2024?

11:15 So, all these factors do, I think, worry us.

11:19 But it's the question of timing which is becoming quite important.

11:23 So, the delayed effect of the fiscal, which were big fiscals which were done during the

11:29 COVID years, have played a very big role in supporting the consumer.

11:33 So, they have kept on spending despite the inflation shock and the tightening shock,

11:37 or at least so far we have seen.

11:39 So, the saving buffers have come down quite a bit, at least in some income segments back

11:45 to pre-COVID levels.

11:48 So, that means that that demand point you mentioned can become more wobbly.

11:52 But we have to look at the data, and the data so far, especially in the US, is still quite

11:56 resilient.

11:57 So, this virtuous cycle we are in, which is basically companies still see strong demand,

12:03 so they don't change their labor force or don't do restructuring, and that keeps unemployment

12:09 low.

12:10 That means you're still earning your income, and that means earnings are still high.

12:14 So, that virtuous cycle is still going on.

12:16 About the problems, as you mentioned, we are very focused on refinancing, as it picks up

12:22 in '24.

12:23 So, there's interest costs going up.

12:26 Then there's obviously the issue of delayed effect of this tightening on the consumer

12:31 directly through borrowing costs.

12:32 We saw some very unhealthy signs of financing in the holiday season, especially in the UK

12:39 and in the US, as well as credit card loans, borrowing has gone up quite a bit.

12:44 So, that's the most expensive way to finance your consumption.

12:50 So, that means things are low.

12:52 So, those are the kind of factors which we have to watch as we move further into 2024.

12:57 Well, even in India, back home, Salman, the Reserve Bank of India is cautioning lenders

13:05 against their personal loans and consumer loans in a big way.

13:08 And we are not known to be spending via taking loans per se.

13:14 So, I kind of understand that in a limited way.

13:18 But lovely points thus far, Salman.

13:20 Request you to stay on.

13:21 We would love to talk a bit more about asset allocation per se from your lens and from

13:26 your vantage point.

13:28 Stay on.

13:29 We need to slip into a very quick break.

13:30 But on the other side of the break, we'll try and talk a bit deeper about how Salman

13:34 Ahmed sees what quadrant would probably yield the best results from an asset allocator's

13:41 perspective and talk more about the scenarios they have painted out in the note.

13:46 Stay tuned, viewers.

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16:08 Back with Worldview right here on NDTV Profit in conversation with Salman Ahmed.

16:13 He is the Global Head of Macro and Strategic Asset Allocation at Fidelity.

16:18 Salman, may I request you now to tell us from your vantage point when you look at asset

16:25 allocation for 2024 and beyond, assuming that you do divide things into quadrants, where

16:30 is it that you believe things are more predictable and best placed from an asset, from allocating

16:37 capital?

16:38 From a medium-term perspective, what we have seen is that value has appeared in fixed income.

16:45 So, if you look at our capital market assumptions, the expected return for bonds was negative

16:50 two years ago for a 10-year horizon period.

16:53 Now, it's quite significantly positive.

16:56 So, from a more SA or strategic asset allocation perspective, we think fixed income has gathered

17:03 that value again, which was not the case at least two, three years ago.

17:08 But at the same time, we are also looking at a world which is likely to see more higher

17:12 average inflation.

17:13 That's something we have been talking about for the last two, three years now, that we

17:17 are entering a regime shift there, which is that inflation will likely average higher

17:23 and the Fed's actually signal with the noise they gave also, I think, gives us more confidence

17:31 that they will accept higher average inflation going forward.

17:38 So, that means higher cash rates, more so than we have been used to from a dollar perspective,

17:45 euro perspective, or even a sterling perspective than in the past.

17:50 So, that means your asset allocation has to think about what kind of segments of fixed

17:55 income you are focused on.

17:56 We are focused a lot on IG, where we think you can lock in around 5% still for the next

18:02 few years and then immunize yourself versus the Fed's cutting cycle.

18:08 But then parts of equity markets where some themes can be very, very strong, so whether

18:14 it's AI or whether it's transition materials because of the decarbonization trend, which

18:23 is likely to even get stronger going forward.

18:25 So, there are some thematic parts we are also focused on as we are looking for the next

18:30 five years, for example, in terms of generating maximum investment returns.

18:35 Saman, if the cyclical recession argument turns out to be true and maybe slightly more

18:40 worse than what you might be pencilling in, could it happen that there are more aggressive

18:45 rate cuts than what is thought of and therefore fixed income has a much better next 18 months

18:51 and equities might have a much worse off or might be much worse off than what the world

18:56 might be pencilling in right now?

18:58 So, that's obviously the worst that expected cyclical recession if it comes through.

19:05 Definitely, that's the kind of correlation you will expect where bonds do much better

19:10 than equities and equities have negative nominal returns in that scenario.

19:16 But one point I want to mention is that we have seen very significant moves already in

19:21 bond yields.

19:22 So, you may see volatility and consolidation still trying to play each other off going

19:29 forward, at least in the short term.

19:31 But we do think that in this cycle, bond yields are likely to bottom at around 3%, for example,

19:40 for the 10-year part because of this higher average inflation point I mentioned and the

19:46 fact that fiscal has become structurally more easy, especially in the US.

19:51 So, that requires some term premia to start coming back into the picture.

19:56 But still, on a relative basis, I agree with you.

19:59 That's how you would be positioning as the evidence for cyclical recession becomes clearer,

20:03 which is not the case right now, but we think it will become more clearer as we go deeper

20:07 into 2024.

20:08 Okay.

20:09 You think the world is pricing things in for a soft landing right now firmly and would

20:15 be in for a surprise?

20:16 Exactly.

20:17 If the probability scale went to 200%, I would say it is a very firm soft landing right now,

20:26 which basically reminds me of how we started in 2023, where there is a lot of risk of talk

20:32 of recession.

20:33 And then, you know, the year panned out quite differently.

20:36 So, in 2024, there is a lot of optimism, which has come through, which tells me that you

20:42 have to be very careful as 2024 goes through.

20:45 Cool.

20:46 You mentioned this very interesting thing about don't forget the tails.

20:48 I know it's for one of the scenarios, but I would love to understand if you broaden it

20:51 out to talk about almost every scenario under the clock, what are the things that you would

20:57 watch out for the most?

20:59 So, as you said, if you are going to map out the tails and, you know, anything is possible.

21:05 But I think the one specific tail, which we apply 10% risk to is the balance sheet recession

21:11 risk, which is that if we are all wrong and then this tightening has actually has been

21:16 very significant and had delayed effects.

21:19 Please remember that debt ratios are at record levels right now.

21:24 And there's been a significant pickup in debt, especially after the pandemic, but also the

21:28 last since the GFC, especially on the public balance sheet side.

21:33 So, if that, you know, and corporate to a certain extent, I think also, especially in

21:37 the US, has been on better shape, but it's corporate and public balance sheets.

21:43 So, the risk there is that, you know, that you have widespread deleveraging cycle take

21:50 hold and then you go back to a deflation risk.

21:52 That's not our base case, but that's something we have to keep in mind.

21:55 The real rates have gone up very sharply at our time and debt is very, very high.

22:00 Okay.

22:03 And, you know, one of the last pieces in a scenario four, which is no landing and, you

22:10 know, is, I mean, while you assign a 10% probability, is a higher for longer narrative and much

22:17 higher for longer narrative firmly out of the window because of the forces at play.

22:21 I mean, everybody talks about how technology brings, you know, inflation down, demographic

22:26 forces bring inflation down, and despite maybe de-globalization in play, we're not looking

22:32 at rates being substantially higher for substantially longer.

22:35 And there is a view like that.

22:36 I mean, I'm just trying to understand how you think about it.

22:39 So, for Suman, a sustained basis, we think no landing is very unlikely.

22:45 I mean, you may see episodes of no landing and pricing starting to come in like we saw

22:49 late summer, but we don't think that's sustainable because as no landing comes in, you know,

22:55 financial conditions tighten and, you know, the markets start doing the Fed's job in that

23:01 sense.

23:02 But from a sustained perspective, as you mentioned, we are not in the camp that inflation averages

23:07 5%, 6%, 7%, but it's more about from 2% to 3%, for example, or slightly above 3%.

23:15 So that's the kind of average delta or change we are thinking about.

23:20 And the reason why we don't think that, you know, rates can go meaningfully higher and

23:25 stay there for a very long time is there's so much debt in the system, unless and until

23:29 the key central banks want to risk a massive deleveraging, you know, cycle with political

23:36 implications for social implications.

23:38 We think that that scenario is not politically viable, if you will.

23:42 Even if inflation due to whatever factors, including maybe commodities, maybe geopolitics

23:48 stays higher, you think that would still be a low probability?

23:52 So, in fact, if you look at the last two years, the central banks may be very happy with the

23:58 way they have done their job.

24:00 So, you know, they may say, oh, we tighten and look at where the inflation has come through.

24:04 So I think that confidence, it probably will give them confidence that they can always

24:09 bring inflation down.

24:11 But they don't have to remain, you know, higher for longer because of this debt load.

24:16 So I think there is that balance.

24:18 In fact, the last two years, they may get more confidence out of the fact that their

24:22 policy tools are working.

24:23 OK, Salman, my final question, and I'm drawing the attention back to how we started the interview

24:28 from when you talked about how in some sense geopolitics is already impacting flows into

24:34 ASEAN countries relative to maybe some of the others.

24:39 I would love to understand how you think about flows for the next two or three, because I

24:43 keep on hearing about this China plus one and Europe plus one impact, not just on India,

24:46 but a bunch of other ASEAN countries.

24:48 And but we don't see that proof of the pudding, at least when it comes to India in FDI flows.

24:54 We see it in portfolio flows and maybe it's easier to do portfolio flows versus FDI in

24:58 various countries like India.

24:59 But I'm just trying to understand how you think about it.

25:02 I think this is a serious trend, especially for goods manufacturing because of supply

25:09 chains and decoupling, as I mentioned earlier, which is here to stay.

25:13 Obviously, it may ebb and flow, but it's a structural reality.

25:17 And we are seeing data, especially for ASEAN, where manufacturing oriented capital is going

25:23 through.

25:24 And it basically goes back to, I think, the country's strengths and weaknesses in terms

25:32 of absorbing the kind of capital.

25:35 And so governance matters, regulations, reform will be needed in that case.

25:39 But some of the countries which have already had some manufacturing base, I think is attracting,

25:44 starting to attract quite a bit.

25:45 We see that in Mexico, for example, on the North American side of things.

25:49 So it's a real trend.

25:52 And we think that will that and then the election in the US in November are going to be critical

26:01 in terms of the direction of this trend going forward, because security matters, especially

26:06 when you're talking about goods manufacturing and supply.

26:09 Got it.

26:10 Salman Ahmed, it was lovely talking to you, very insightful on a number of things.

26:15 I wish we could have spoken earlier, but nevertheless, we just launched.

26:18 Great to have you and look forward to have you more on our channel and on our platforms.

26:25 Thank you.

26:26 Thank you.

26:27 Pleasure.

26:28 And thank you for joining in.

26:29 And of course, thanks for tuning into this episode of WorldView.

26:31 WorldView.

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When Will The Fed Cut Rates? | The Portfolio Manager | NDTV Profit

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