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US markets may not have hit bottom yet, warns Bhanu Baweja, chief strategist at UBS Investment Bank. In an interview with Himadri Buch, the UK-based Baweja said Indian bonds offer better returns than equities. Edited Excerpts:
The 90-day tariff pause seems to have given a breather to financial markets. Is the worst over?
I'm not sure the worst is over for the markets yet, as the base case for tariffs remains a difficult question. It's also possible that reciprocal tariffs could be reinstated on July 2. We assume 10% universal tariffs, with China's tariffs reduced from 145% to 60%, but even this isn't fully priced in. The market has sleepwalked into these tariffs, thinking they are a negotiating tool and that the Trump administration will relent at the slightest pain. Both assumptions are being questioned. The bad news isn't over, and the low is not yet over.
FIIs have started reallocating money into Indian markets. Is it long-term money or is it just a short term money?
Flows into Europe and emerging markets, including India, seem more tactical than permanent. We have now moved from underweight to neutral as valuations have adjusted, although still high, but less extreme, and growth may be near a trough. I don't think the US has hit a bottom yet. So, this is not a great environment to be long on equities. Bonds probably offer better returns than Indian equities.
What is the US Treasury market telling you about the US economy?
The US Treasury market is actually not telling you anything about the US economy, because the US economy is quite is heading towards weakness. While current numbers are not weak, visible weakness should be seen by third quarter. Many foreign investors are selling US bonds due to concerns about geopolitics and tariffs. From the economic viewpoint, treasuries are a buy. Unlike equities, where I am selling on rallies, I am buying bonds on dips.
Do you see the US dipping in to a recession?
Our official GDP forecasts do not see a recession. The consensus was about 2% growth in the US earlier this year. We were at 1.7%, and now we think the US growth for this year is going to be something like 0.8%. GDP aggregate demand is consumption (C) + investment (I) + government spending (G) + net exports (X)- Imports (M).
What’s going to happen is that M, or imports are going to collapse. We are beginning to see this in real time. If US imports are coming down, then GDP is not collapsing. But if you just look at consumption, investment and government spending, that is going to come down hard, and that is going to go into recession, and that’s going to matter for earnings.
So, I will take no comfort as an equity investor that GDP is not going to go into recession. The domestic demand situation looks considerably worse than it looks for GDP. So, its cold comfort that we don’t get a GDP recession.
What is your outlook on US dollar?
We are negative on the dollar, but that doesn’t mean we are buying emerging market currencies like the rupee or renminbi. This is not a classic dollar weakness where global growth is strong, as seen in 2005, 2010, and 2016. In those times, the dollar weakened while global growth improved, and riskier currencies benefited. Today, the US is going from exceptional to ordinary, and global growth is declining, not improving. The dollar is likely to be weak, but it will be weak only against safe havens such as gold, yen and European currencies, and not the rupee or renminbi.
What kind of returns do you expect from Indian equities this year?
We are cautious. You could get up to 4–5% returns in equities, but the risks are skewed to the downside, as markets may come under pressure before improving. The trajectory will be similar in the US and globally. The bottom is likely in third quarter, with some pressure before recovery. Markets may end the year slightly higher perhaps 3–4% but not before a dip. We don’t think we have seen the lows yet.
Which are your preferred emerging markets?
We are keen on being in North Asia. We have been long on China because, despite the economic hit, many Chinese companies are not significantly exposed to the US export cycle, and there is domestic stimulus coming through. We are neutral on Korea. Within Asia, we like China, Indonesia, Malaysia, and Thailand. Our theme has been to be more domestic and defensive right now. We are quite cautious. We are market weight EM, not overweight. Within that, we are market weight on India. We are overweight on China, Indonesia, and Malaysia. Korea is between neutral and overweight.
What is your view on China?
China is in a trend slowdown. It’s economy is slowing, but its stock market holds up due to ample domestic liquidity and expected stimulus. We are much more cautious on the renminbi as it is likely to remain under significant and sustained depreciation pressure, as locals slowly leave China for investment elsewhere. We like equities, bonds but not forex. China’s excess capacity hurts global markets, including India, by delaying local capex and pressuring the rupee.
Do you think gold prices will continue to rise?
Gold’s fundamental driver is high US real rates. If US real rates fall by 100 basis points (or 1%), gold rises by 14%. That relationship has completely been broken, because even though US real rates are rising, gold is still rising. So, I expect that as US real rates fall from here, gold will respond. We are looking for at least 10-15% further upside in gold. In terms of troy ounces, gold is already at a very high level, but we would not be surprised to see gold reach around $3,600.
If you had to advise a global investor wanting to allocate fresh money today, where would that be?
US Treasuries are quite attractive. I would have a preponderance of fixed income rather than equities for the next six months. Within fixed income, I would be overweight on emerging markets, but also include US Treasuries and UK gilts. In equities, we would be in domestic and defensive sectors, overweight Europe, neutral on emerging markets, slight underweight on the US. That’s a tactical call, not for the next five years, but for the 3-6 months.
English (US)