Don’t see a world where we’re not going to have higher rates: Mary Callahan Erdoes

India has become more investable because of the reforms that could make its growth continue to accelerate, said Mary Callahan Erdoes, CEO of JP Morgan Asset & Wealth Management with over $4 trillion in client assets. In an interview with Nishanth Vasudevan during her recent visit to Mumbai, Erdoes spoke about various topics including plans to re-enter India’s mutual fund industry, troubles in the US banking system, inflation and interest rates among other subjects. Edited excerpts:

What explains the resilience in the stock market of late despite high inflation, high interest rates, US bank failures and a looming US slowdown?

The markets are resilient because there is still a lot of money on the side-lines. There is still an enormous amount of cash, and it keeps getting deployed. It is important for everybody to remember that the world has never gone through the quantitative easing of money in such a concentrated manner, in almost every country at the same time. We had quantitative easing for years and then we had Covid. So, there was already all the money out there. And when Covid came, it seemed like someone took a hose and was just spraying dollar bills instead of water. It didn’t matter where. All that money is being spent on houses, goods and services, home improvements, and the likes. And then suddenly you have inflation. When inflation goes around, it is really hard to control. The people who know how to control inflation know that rates need to be ratcheted up quite heavily. And so now we have embarked on quantitative tightening. And that has not happened in the way it should be happening. Now instead of the hose, a vacuum cleaner is picking up all the pieces of paper around, but it doesn’t know where it’s picking it up. That is causing liquidity problems in the US regional banking system. There will be other issues when you start having quantitative tightening. We just don’t know what the results will be. That’s what the world is dealing with right now.

Do you anticipate more problems in the US banking system?
It was a classic liquidity problem that has been mostly limited to the smaller regional banks, because the regulations there are different than the bigger banks. That doesn’t mean there won’t be further problems that will come from credit issues. I think that liquidity issues are for the most part behind us, but there will be new issues.

Investors worldwide are watching US inflation data like never before. How sticky will inflation be?
When people say sticky, the first thing that comes to most people’s minds is the price of a bottle of water that was $1 and then became $2 and is $7 at the airport. The rate of inflation is not going to keep going like that, but it takes a long time to go back down in price. So, the stickiness of prices is very likely to stay. The stickiness of 100% rate of inflation is not going to stay though. There’s another little problem with the supply of oil in the world. So, inflation is just harder than it looks to contain.

We also have a US presidential election coming up. Although it’s not until next fall, the process starts this summer. Different things can happen with the current administration in an effort to make sure that people feel good about their wellbeing between now and when they want to get elected. And so I think you might see very friendly policies and that’s good news for the US consumer.

And that’s tricky for the US Fed…
Exactly. That can generally be inflationary. The Fed knows that. Every time the Fed raises rates, it changes the discount rate back on every single security in the world because of the base level of discount. And therein lies the conundrum.

The Fed’s job is to control inflation and to keep price stability. It needs to balance that when the markets are in gyration. But it doesn’t mean it just stops its mission. So, it may very well pause. But I don’t see a world where we’re not going to have higher rates.

So, what will a winning portfolio look like in these conditions?
Those companies that are super strong, ready for it, aren’t over-levered and know how to continue to improve their margin through the use of technological advances, particularly in the AI space, are going to be end-game winners. There are going to be great beneficiaries from that and those companies will continue to accelerate. I say to myself if you aren’t having very deep conversations about how AI is going to change your company, you’re probably in the process of losing. Because your competitor is. That’s causing the disruption. And I think it’s going to continue to have massive winners, and unfortunately, massive losers. So, the only thing I can totally 100% predict is high volatility. Individuals who aren’t stress testing higher rates on their portfolio and those who are over levered might struggle. It will be the same for people, who think that the way they made money in the past 10 years, is the way they’re going to make money in the next 10 years. It’s going to be a very different world, because most people haven’t lived through inflationary time periods.

Where does India fit into your list of investment destinations?
India has become more investable because of the reforms that could make its growth continue to accelerate. It’s now the most populated country on the planet. And so, it has a lot of talent. If properly trained, that can be put to work in a manner that is hugely powerful. At a wage level, that is still lower than where it could be. That’s still exciting for the country and for multinational companies to be able to continue to invest here.

Since Covid, there has been a lot of talk of investments shifting from China to India. Are you seeing this trend picking up?
When you invest anywhere outside your home country, there are questions as to whether you understand the rules and how they can or cannot change in an instant, especially for foreign investors. There are a lot of questions about whether rules can change after an investment is made in a particular place.