 "In stable circumstances, India can see many more deals: Ken Moelis")
Veteran investment banker Ken Moelis, who moved out of Swiss bank UBS in 2007 to set up an investment banking advisory firm in the US, says technology is changing the world and he is lucky to be able to participate in the process. The 56-year-old founder and chief executive officer of Moelis & Company believes this is leading to deflation in the US economy, which will limit mergers and acquisitions (M&A) to consolidation efforts. But this is why it is good news for India. Moelis set up its operation in India about a year and a half earlier, as he believes US corporations will chase assets in emerging markets to seek growth. Edited excerpts of an interview with Abhineet Kumar:
US GDP (gross domestic product) grew at 2.7 per cent in the last quarter. Do you believe it can reach a three per cent growth rate in 2014?
I am not a believer that we can go to three per cent growth. The US is weaker than people think. I think there is a huge backlash now against government. I think the way Obamacare hit the market, there is a large constituency that does not have faith in government spending right now. And, it would be very hard for Congress to pass large government spending. I would not expect to see any stimulus package like that.
Our government is not as supportive to businesses as it could be. I think we should have been growing at more than three per cent annually for the past three years. So, despite very difficult things like health care, there are significant headwinds in the US economy that can hold us down.
What does it mean for the M&A market?
The M&A market in the US is now driven as a result of low growth. Most of the mergers we are talking about are two competitors who do not see enough growth and are deciding to take out costs. So, consolidate and reduce expenses. But if we were growing at three or four per cent, we would have seen a different kind of M&A market, that would have been growth-led. When you start to grow at 2-2.5 per cent, then you see more M&A, to reduce cost.
What does it mean for inbound deals for India?
India is being hampered a little bit with people’s fear. If India becomes stable, consistent and the rule of law supports investment, India has the growth potential. In the US, they are consolidating operations with 2-2.5 per cent growth and deflation in pricing. So, where would it be attractive to seek growth without political risk? India definitely has the growth opportunity. You would see people coming into India for growth if there are stable circumstances.
The growth will be there in emerging markets; one has to choose where and who. A lot of people were looking to Turkey three to four years earlier. That is not as exciting. Brazil is a big market. I think even Mexico will become a big market for the US. Mexico is starting to stabilise. Western Europe will look to Eastern Europe for their growth. Everybody wants growth. That is why I think it is up to India to step up and say, come over here.
Assuming there is no stable government following the general election, how would it impact investments in India?
Capital is incredibly efficient. It will find the best risk-reward for the return. If India continues to stay on the outer edge of risk, regulatory, government stability risk, it will have to provide a higher return or the capital does not come here on good terms. I hope that does not happen. I hope the election leads the other way, to stability and confidence.
What is your view on the US Fed’s tapering of quantitative easing and its impact on India?
When you put excess money in a low growth economy the money goes to the highest standard of risk, and it does flow to emerging markets. It flies to high-yield bonds. So, the excess money that is printed out tends to go to the risk-end of the curve. All different asset classes but one of these is the emerging market or developing economy. And, when the Fed tapers, what we are seeing now is money first coming out of the risk assets, and that is what you are seeing.
Does that mean valuations will come down for the Indian assets?
I think it is way more to the fundamentals of the Indian assets.
US GDP (gross domestic product) grew at 2.7 per cent in the last quarter. Do you believe it can reach a three per cent growth rate in 2014?
I am not a believer that we can go to three per cent growth. The US is weaker than people think. I think there is a huge backlash now against government. I think the way Obamacare hit the market, there is a large constituency that does not have faith in government spending right now. And, it would be very hard for Congress to pass large government spending. I would not expect to see any stimulus package like that.
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Then, I think the US labour force is weaker than reported in the statistics. The way they report the unemployment rate, it is taking a lot of people out of the labour force (calculation). A huge amount of people are self-reporting that they are out of the labour force; it means less people are saying they’re looking for a job. Which, I do not think, is a strong indication for the economy.
Our government is not as supportive to businesses as it could be. I think we should have been growing at more than three per cent annually for the past three years. So, despite very difficult things like health care, there are significant headwinds in the US economy that can hold us down.
What does it mean for the M&A market?
The M&A market in the US is now driven as a result of low growth. Most of the mergers we are talking about are two competitors who do not see enough growth and are deciding to take out costs. So, consolidate and reduce expenses. But if we were growing at three or four per cent, we would have seen a different kind of M&A market, that would have been growth-led. When you start to grow at 2-2.5 per cent, then you see more M&A, to reduce cost.
What does it mean for inbound deals for India?
India is being hampered a little bit with people’s fear. If India becomes stable, consistent and the rule of law supports investment, India has the growth potential. In the US, they are consolidating operations with 2-2.5 per cent growth and deflation in pricing. So, where would it be attractive to seek growth without political risk? India definitely has the growth opportunity. You would see people coming into India for growth if there are stable circumstances.
The growth will be there in emerging markets; one has to choose where and who. A lot of people were looking to Turkey three to four years earlier. That is not as exciting. Brazil is a big market. I think even Mexico will become a big market for the US. Mexico is starting to stabilise. Western Europe will look to Eastern Europe for their growth. Everybody wants growth. That is why I think it is up to India to step up and say, come over here.
Assuming there is no stable government following the general election, how would it impact investments in India?
Capital is incredibly efficient. It will find the best risk-reward for the return. If India continues to stay on the outer edge of risk, regulatory, government stability risk, it will have to provide a higher return or the capital does not come here on good terms. I hope that does not happen. I hope the election leads the other way, to stability and confidence.
What is your view on the US Fed’s tapering of quantitative easing and its impact on India?
When you put excess money in a low growth economy the money goes to the highest standard of risk, and it does flow to emerging markets. It flies to high-yield bonds. So, the excess money that is printed out tends to go to the risk-end of the curve. All different asset classes but one of these is the emerging market or developing economy. And, when the Fed tapers, what we are seeing now is money first coming out of the risk assets, and that is what you are seeing.
Does that mean valuations will come down for the Indian assets?
I think it is way more to the fundamentals of the Indian assets.