Most influential investors across the world are calling for a strong rebound in emerging markets this year, coming off from a low base last year because they were so oversold. Do you agree?
We are seeing signs of that. This is a bounce from oversold levels. Investors panicked in the fourth quarter of last year and markets were almost priced in a near-term recession. We think that is unlikely and that the growth differential will move in emerging markets’ favour. In the short-term, we will see some recovery in the emerging markets.
Do you believe that the overall valuation picture is far more attractive than what we witnessed in the beginning of 2018?
Beginning of 2018, investors were convinced there was going to be strong synchronised global growth and valuations were at relatively rich levels. We had a year of a strong global economy, strong corporate earnings and yet markets have been flat to down. Obviously, valuations have come down quite a lot. 2020 will be the year where perhaps the global economy does less well but markets nevertheless rebound. That is quite possible.
Is there a chance of a recession in the United States? What do you believe will be the overall trickle-down effect if we do?
This has certainly been in the headlines in recent months. We still see very little evidence of that. The indicators that we look at most are based on hard numbers, like the Chicago Fed National Activity Index or various factor models and these show very little chance of a recession. Some of the models which include financial variables like the yield curve are showing us a higher probability, but we think those are biased in this environment and we certainly think the survey of CFOs which suggests an almost 50% chance of recession is really showing some panic. Maybe the CFOs were too close to their own share price.
What about India’s outlook within the EMs?
India held up well. Last year, it showed that it is relatively defensive in a trade friction environment with the major markets in the EMs. But it suffered because of the currency. But as long as the oil prices behave and as long as the parties ahead of the election do not promise too much in terms of populist policies, the outlook for India looks pretty good.
Pretty good for sure but relative to the rest of the region, within the pecking order where would you place India?
Tactically, the China markets, Korea, etc, have sold off an awful lot and they look particularly cheap. So if you are looking for a rebound from oversold markets, those are more attractive. But in terms of the long-term view, the secular growth story is there in India. Elections so far really they contributed to some volatility. A dip in the few months ahead of the election and then rebound will not make foreign investors too concerned.
Also, the stock market in India has done well under coalition or under Congress-led government in the past. We are seeing rebounds in private sector investments. India stands a chance of sustaining 7-7.5% growth in the next few years without inflation. I would say India deserves to be quite high up in the pecking order.
The world is obsessing about China’s slowdown. But isn’t China a buying opportunity? Do you think in this downcycle, we have seen the worst or will the trade deal peg China back lower in which case of course investors will want to wait and watch out for a better buying opportunity into the region?
If you put trade concerns to one side, then that is right. China approved more infrastructure projects in December than for the last 11 months in 2018. They stepped on the brakes too hard in the first half of last year. It has taken them a while. I do not think we are going to see a massive fiscal stimulus but we will see more stimulus measures coming. Perhaps a VAT cut in around April and that should be enough to see China economy stabilise in the first half of the year, than begin to improve in the second half. On that basis, given how far share prices have fallen, China is a clear buying opportunity.
How do you think the Indian equity markets are going to react to this big event? Will the first half of the year be very different from the second, given that the big event will be out of the way?
It is a huge event and after losing a number of key states in the December state elections, it is certainly a wake-up call for Mr Modi. I believe that he has probably done enough in terms of economic reforms to deserve a second term. Whether that will actually work out, I am not so sure. I think both sides now are looking to the fact that real incomes have fallen for rural workers and they both have policies to do something about that. It is going to be a close fought race, but whichever side wins, think foreign investors are more interested in the longer term, the secular growth story in India and that is looking pretty good in terms of the economic fundamentals.
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