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Thank you so much for joining me. I'm going to pick on a few themes and also try to tie it in with your visit here in this context. But before that, how are you feeling?

Look, there are millions of reasons to be worried. There's the Iran war, oil prices going up, the Fed's hiking cycle beginning, the ECB has done that, the Bank of Japan has done that, the Bank of England has done that. Will emerging markets be far behind? So if you want to get scared, there's sticky inflation. If you want to get scared, there are lots of things to be scared about.

But at the end of the day, we also have to ask why these central banks, at least the developed-market central banks, are hiking rates. It's because they feel much more comfortable today than they did six months earlier about the resilience of growth. And that's a significant positive for emerging markets, because most of our external demand is a derivative of that growth.

So I'm more or less okay with emerging markets. If you look at the last five years, emerging markets have gone through one of the biggest health shocks in the world, COVID. Then there was a massive spike in inflation when reopening started. Then there was a massive spike in energy prices after the Ukraine war, which coincided with 500 basis points of rate hikes by the Fed. And remember, during most of this period, China, the largest single driver of emerging-market growth, was shut down.

Go back to 2013, when there was a whisper that Ben Bernanke might someday decide to taper QE, and five emerging-market countries, Brazil, India, South Africa, Mexico, and Indonesia, all went through a near or actual financial crisis. Emerging markets have shown that at least these 10 to 20 countries can withstand these kinds of relentless global shocks. So I'm feeling reasonably comfortable that emerging markets will continue to show this resilience.

So that's the good news?

That's the good news. The bad news is that much of this growth resilience isn't being driven for the reasons people usually talk about — AI-related investment. Those are very large numbers; we're talking about trillions of dollars of AI-related investment, but almost all of that is imported. The actual driver of growth over the last nine quarters in the US has been the consumer.

And that consumer strength hasn't come from rising household income, because wage growth has actually slowed, not negative, but steadily slower, which speaks to the lack of bargaining power labor has. Instead, it's come because the household savings rate fell from 5% to 2%, much of it reflecting very strong, almost unprecedented increases in wealth. Some of that decline in the savings rate is natural, but a rate of 2% is very low.

So the question is: if household income growth doesn't recover, can consumption stay strong? There's still some room for the savings rate to fall further, US households have gone into negative savings territory before, but that didn't work out well, because that happened just before the global financial crisis. So the room for the savings rate to fall further and keep supporting consumption is getting very tight. That's the concern.

And how does this, including the resulting capital flows out of markets like the United States, affect emerging markets? We can come to India as well.

Right now, "emerging markets" as an asset class, the way we used to think of it, doesn't really exist anymore. We still have the GBI-EM Index, the MSCI Emerging Markets Index, and so on, but no one really allocates money to the index anymore. The big 20 emerging markets are now being treated separately, each is its own idiosyncratic story.

One factor that used to matter a lot, how attractive Chinese equities are, no longer does, since Chinese equities haven't attracted foreign capital for a long time, for a completely different set of reasons. That leaves emerging markets outside China. In equities, the largest and most diversified market is India, followed by Korea, though Korea is essentially driven by two stocks, and Taiwan by one. India is the one market with real diversification, yet it has largely moved sideways. So the ability of emerging markets to attract equity flows looks very limited, because most don't have the depth to absorb significant capital without becoming overvalued.

That leaves fixed income, a very large pool of capital that can absorb significant inflows. Over the last three or four years there's been relentless outflows; now we're seeing some inflows, but well below historical levels. But how do you invest in emerging-market fixed income when the US 10-year is running at 5%? So I don't think capital flows will reverse outright, but getting them back into emerging markets will be challenging.

And when you say emerging markets are no longer seen as one homogenous unit, is this the first time this has happened in about three decades, or has it happened before?

In the earlier decades there wasn't really an "emerging markets" concept to speak of, so let's not go back further than that. Roughly since 2018–19, emerging markets stopped being an attractor as an asset class, and individual country stories became the drivers instead. The 2013 taper tantrum was to emerging markets what the 2008 financial crisis was to developed markets, it changed how the world saw them. I think emerging markets as the go-to for high-risk, high-reward flows, which is how the asset class used to be characterized, has gone away. The new high-risk, high-reward places are what we now call frontier markets. So that's probably the "emerging markets" of 30 years ago, but the emerging markets of today have become individual stories.

Right, so let me come to India. A few factors, going back to where you started, and the relative optimism, also flow into how companies have performed, particularly last quarter, with a sense of continuity into the second quarter, even though macro factors still look wobbly. What's your sense of what's working and what isn't, from your vantage point?

The concern we spoke about earlier and the one we've had for the last couple of years remains the same. Go back to 2010–12: oil prices were above $100, and India's current account deficit was about 3–3.5%, which was easily financed, until it hit 5%. If you and I were discussing Indian macro today and I told you growth is doing this, inflation is doing that, and the current account is at 1–1.5% of GDP, you'd conclude this should be a very good year for the rupee. It hasn't been, for the last two years, because of a capital-flows problem that's now well documented, but the structural reasons behind those outflows haven't really been addressed. That will continue to make it hard for India to reverse those outflows, both FDI and portfolio.

We spoke about this exact topic a few months ago, and you pointed to both the current account deficit and the challenge of reversing flows. Has anything changed, or is there hope on the horizon, on the policy side, that could influence those capital flows?

Go back to the first question. Since World War II, the global economy has largely been organized around one principle: seeking the lowest cost of production. That drove the huge rise in manufacturing in the US and Europe, the reconstruction of postwar Europe and Japan, and then, as China and other Asian economies entered the picture, massive offshoring but always for the same reason: find the lowest cost of production.

Over the last four or five years, that's no longer the organizing principle of capital or industry, and so it's no longer the driving principle of trade or capital flows either. Now it's about finding the safest place to invest. At JPMorgan, we have a $1.5 trillion initiative in our loan book to promote security and resilience, plus $10 billion of our own capital invested in companies that support security and supply-side resilience.

Are these equity investments in companies?

Yes, $10 billion of our own capital, plus a $1.5 trillion loan book, directed toward companies promoting national security and supply-side resilience: rare earths, pharmaceuticals, defense, that kind of thing. And we're not the only bank doing this; others are doing it too, maybe at a smaller scale. So the world has shifted toward seeking the safest place to produce things, rather than the cheapest.

But look at where India's policies are. All emerging markets are in the same boat, but where is the policy shift in India that says, "Come to India —it may not be the cheapest place on Earth—"

"—but it's the safest place on Earth"?

Exactly — it's the safest place on Earth. Where is the policy shift saying, "We can't compete with China on price, but we should be able to compete with China on supply-chain resilience"? There is no such shift. There's no discussion of that, whether in Delhi or Bombay — that the world's organizing principle for industry is no longer the cheapest place to produce things, but the safest, and I think India is missing out on that.

Can you unpack "safety" a bit more?

Take pharmaceuticals, the easiest example. We produce mostly generic drugs and supply them to Europe, the US, and elsewhere. The reason the US and Europe buy generics from India is that our production facilities are reasonably safe and cheap. But we're only cheap because we import the basic materials — the APIs — from China at low cost.

All the APIs are produced in China and imported?

Yes. So as far as the US retailer's supply chain is concerned, it isn't actually safe, China could switch off API supply to India at any point, just as it did with rare earths, and there goes India's generic drug supply. Where's the push to produce APIs, the basic pharmaceutical materials, in India? There hasn't been one.

There was a push after COVID, or around COVID—

Yes, but it hasn't materialized to the extent it should have. That said, we are making some choices, we do provide incentives. Semiconductors, for instance, we're providing incentives there. Rather than compete with China on the cheapest semiconductor production, we could compete by saying our supply chain is more resilient because we supply the underlying chemicals ourselves, and that comes at a price. But it's a price worth paying for a much more secure supply chain running through India, rather than one that still ultimately depends on China, even if, on the surface, you're importing drugs from India.

Is pharma the dominant example, or are there others?

It's just the easiest one — but almost everything has the same element. If you could start producing the upstream part of the supply chain in India — which currently doesn't exist, only the downstream part does — there isn't much push, whether through incentives, policy, or within corporates themselves, to build that upstream capability. It's the same story with solar panels: we can produce the panels in India, but almost all the components come from China. So we're not really offering any supply-chain resilience or assurance to end consumers in the US or Europe that the supply chain is more secure through India. It's the same with large batteries.

We recently wrote a report on chemicals, sulfuric acid, for example. Producing sulfuric acid isn't rocket science. Why don't we have a supply chain for it that's entirely based in India? We don't.

And you're saying that if more of these ventures came up, capital would be interested?

Capital would be interested, because that's exactly what capital is telling us back in the US — we're putting in $1.5 trillion, signaling that this is the direction of travel. But in India, and other emerging markets, that direction of travel isn't being recognized as such. The answer isn't to keep saying, "Come, ease of doing business is improving in India." We've been trying to improve ease of business for 30 to 50 years, and it hasn't eased that much. So why keep fighting something that's structurally very difficult to fix in India? Shift the focus to safety of business rather than ease of business — and there's a premium to be paid for that, because investors are willing to pay it. They're putting their money where their mouth is; it's not just talk.

One point you made last time, and let me make this my last question too — the nature of large Indian enterprises that have tended to hold on to their old positions—

I knew you were going to ask that.

—and another brokerage has put out a fairly strong note on the same theme, saying some large-cap traditional companies have stayed within their moats — and even reinforced them — more for protection than anything else. I know your view probably hasn't changed much, but how do you see things going forward?

I think new industries will emerge. I'm complaining that people haven't yet realized the world is shifting from lowest cost of production to safety of production but that penny will drop, maybe not today, but eventually. When it does, I think you'll see new sectors and industries created. I don't see existing sectors being displaced by newcomers, but you will see new industries emerging and then there's AI.

For all the gloom and doom about AI, I think it will do what every technology has done since the invention of fire: create new industries. I have a lot of faith that within those new industries, you'll find newcomers and startups who, in 20 years, will themselves become incumbents defending their turf, but that's 20 years away. That penny needs to drop, and that shift needs to happen.

Is it the house view that AI will be a net positive for jobs, including in countries like India?

No single house view, there are a lot of different opinions across J.P. Morgan Research on this. We don't have a consensus view that AI is going to kill employment. What we do agree on is that labor's bargaining power has weakened considerably, you can see that just by looking at the US wage share, which at 52% is the lowest since records began, going back to the 1920s and '30s. So bargaining power has weakened and wage growth has slowed, but we don't see that translating into mass-scale job losses yet.

In fact, other people's data suggests that the group we expected to see the largest exodus from, young, skilled labor, is actually seeing significant employment growth. So it isn't true that AI, as of now, is hitting employment volumes; it may be capping wage growth, but not employment itself. That could change in the future, but for now the price part has slowed more than the volume part.

That's a positive note to end on, Jahangir. Thank you so much for joining me.

You're welcome.