India is a big story that isn't going away for 30 years: Jim Walker

Interview with chief economist and investment strategist at Asianomics

Jim Walker, chief economist and investment strategist at Asianomics, is bullish on the long-term prospects of the Indian market, because of its demographic and economic potential. Speaking to Samie Modak on the sidelines of the IIFL Global Investors’ Conference, Walker says the biggest risks for the financial markets emanate from the US. Edited excerpts:

The global markets, particularly the US, have rallied sharply. What is driving the rally and will it sustain?

Equity markets have gone up strongly after Donald Trump’s win in the US presidential election. A lot of it is exuberance over the prospects of a different approach to economics. It is also to do with the fact that there is still a lot of easy money around with interest rates remaining extremely low. However, the economic growth numbers are not strong. So when you are printing a lot of money, when real economic activity is not that strong, then there is a lot of money available for other things like asset prices. We have seen strong flows into the equity markets. We are at a very dangerous stage for the first time in years, where we could have rising interest rates, rising consumer prices and slowing money supply growth. That will be a bad combination for asset prices.

The market is quite gung-ho over Donald Trump. Do you think such optimism is warranted?

The enthusiasm for US equities is way overdone. Obviously, the market would like to see much less regulation, lower taxes and a fiscal stimulus in terms of infrastructure. A lot of that is not going to happen. From March 15, the debt ceiling becomes an issue again. Many people within Trump’s party won’t support an increase in the debt ceiling in the Congress. So the ability to have an infrastructure spending programme in place is limited. Deregulation is possible but it is much more complicated. So there is a high possibility of disappointment.  The markets have got ahead of themselves. They haven’t explored the difficulties the administration will face.

There has been comparison between the Reagan-era and the Trump-era. But when Reagan took over as the president, the governments debt-to-GDP was 30 per cent, today it is over 100 per cent.  It is not possible to do a Reagan type fiscal programme.

The US Federal Reserve is expected to hike rates as early as next month. How will that play out in the market?

If we don’t get a rate rise next month, we won’t get one at all. So next month is an opportunity to move rates up. I would increase rates a 100 basis points (bps). That is because rates are ridiculously low. But the Fed is only going to do  25 bps. But that itself is going to be unsettling for the markets. One of the reasons equities are at such elevated levels in the US is the discount factor (to future earnings) has been so low. When you are adding 25-75 bps, you are going up by a third, so the discount factor starts to go up quite fast for equities, which will make them expensive very quickly. It is possible that we will get a rate rise next month. If we do, that will have such a bad impact on US growth and asset prices that you won’t get another rate increase this year.

What is your view on the dollar?

A strong dollar is a danger for economic growth in Asia. So obviously it is something we are watching closely. It is a difficult one to forecast. The dollar could gain on expectations of an interest rate rise and strengthening US economic growth. But if anything starts to disappoint, including Trump’s policies, then the possibility of the dollar coming off sharply is quite high. I won’t be long on the dollar.

Besides the developments in the US, what are the other key global issues?

There are German elections later this year. There is still some concern over China. We are past the worst for China but the market has not built that in yet. We are also in a year where the Chinese are going to have an election. Not a democratic election but very important one for the current leadership. China is going to surprise on the upside this year.  The real risks of disruption and potential disappointment are actually more in the US than anywhere else.

What is your take on demonetisation?

The timing was surprising. Demonetisation affects consumption more than anything else. So what it was trying to do was slow the section of the economy that was growing fastest.  I am not sure it was an economic reason that drove the demonetisation announcement, I think it was politics. So the timing was much more political. The good news is that the monsoon was much better this year in India. One of the problems in the last couple of years has been the monsoon. To offset demonetisation we are going to see an uptick in public investment. So the prospects for growth this year are strong.

Is the substantial delay in India’s earnings and economic revival a worry?

I expected things to pick up more strongly. Again I go back to two bad monsoons in a row. It has just meant that there has been lack of demand in rural areas. It has meant spending or maintaining consumption by the government rather than it concentrating on investment. But going ahead we see a conducive environment for increased investment spending. So over the course of 2017 and 2018, we will see that elusive upturn.

The Indian markets are near their all-time highs. Are they factoring in most of the positives?

The markets are not factoring in good prospects for India. The economic growth in India has been much stronger than other parts of the world. India’s demographic potential is much higher. What we were trying to say to our clients is that there are only a few places around the world that are outstandingly different and India is one of them. If you think Indian markets are expensive now, just wait, they are going to get even more expensive.  

Increasingly, developed country pension funds and mutual funds are beginning to recognise that they have a major problem domestically in investing. For them there is a major potential in investing in India and other countries like Indonesia, Vietnam, the Philippines and some parts of Africa. But India is such a big story and that story is not going away for 30 years. 

What are your expectations from the government?

Policies should be formulated to take advantage of the strong demographic potential. This government is already doing things to improve the policy and tax environment. India needs just a few right policy decisions and incremental improvements to unleash more growth. The base-case growth rate for India is 5-6 per cent but the potential is 7-8 per cent. That is enough to make me buy India for the next 20 years.