Indices the world over, including in India, are at a new high. This is without proportionate fundamental support. Does this worry you?
Kathryn Shih: We are still overweight on equities, whether in the US, India or China. We like equities over investment-grade bonds. But, we wouldn’t be surprised if there is short-term consolidation. There are risk factors in the market. There are the French elections and the first round was positive for the markets. But, it’s not over yet. Tension in Europe is rising and there is tension in Korea. Therefore, as wealth managers, we advocate diversification. We believe investors have to be globally diversified to benefit from the market environment and should maintain some defensive investments.
Would you review the overweight stand on India, given the run-up?
Shih: We remain overweight on India; it is an attractive market. We won’t be reviewing our stand on the Indian market. But it wouldn’t surprise us if some clients want to take some profit.
We have had a prolonged period of liquidity driving the market. How do you view this?
Aashish Kamat: As the growth story takes over, you will have more mid-cap companies like D-Mart (Avenue Supermarts) coming to the market. So you’ll see the market broadening and then, with promoter holdings coming down, that should deepen liquidity in individual stocks. Given annual growth in India between seven and 7.5 per cent, global funds continue to invest and after demonetisation, domestic liquidity is also finding its way into the market.
But seven per cent growth is still lower compared to the past performance...
Kamat: Our clients tell us that there is a sense of cautious optimism building, with the Modi government winning the mandate in Uttar Pradesh. We always compare ourselves with China. We shouldn’t do that any more. We should focus on how quickly we can become the third-largest economy in the world given reforms such as introduction of the Goods and Services Tax and demonetisation, which will be beneficial in the long run. Yes, the pig is still stuck in the python. Public sector banks have to still acknowledge some of the stress in the system.
Would India be spared from the protectionism that is gaining ground world over?
Kamat: I don’t think the US will want to be seen as someone waging a trade war as it has been projected as being open to free trade. Protectionism could increase the cost of production and result in inflation. So, I don’t think Trump’s 15 per cent tax rate is about that. It’s about giving incentives for companies to grow manufacturing in the US. Most US companies make about 50 per cent of their revenues outside of the US. US corporates will want to make sure that the government does not hinder their ability to continue to grow overseas.
How do you see the US interest rates and dollar movement going ahead?
Shih: We expect the US to raise interest rates two more times — another half per cent — this year. With that, we think, the euro is undervalued to the US dollar. We are optimistic on the euro. We will see the euro starting to pick up as political reasons are keeping it depressed for now.
Will an increase in US rates impact global flows into India?
Shih: A half per cent increase might not deter the flows significantly; rather, we think this would be beneficial for banks as they would be able to make more interest income. Outside India, where a lack of inflation is the problem, the reflationary impact would be good.
UBS has recently posted a good set of quarterly numbers. How significant is India in all of this?
Shih: India is a significant part of our operations. We have two new business solutions centres and we employ more than 11,000 people. We will continue to expand our operations here.
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