India is odd one out in a favourable view of Emerging Asia: Cameron Brandt

With growth in developed markets under pressure from the rising Covid-19 caseload, investors will keep paying more attention to emerging markets, says Brandt

Global markets have been on the edge for the past few weeks in the run-up to the US presidential polls, amid rising Covid-19 cases in the West, and lack of policy response from the US Federal Reserve. With growth in developed markets under pressure from the rising Covid-19 caseload, investors will keep paying more attention to emerging markets, US-based CAMERON BRANDT, director of research, EPFR Global, tells Puneet Wadhwa in an interview. Edited excerpts:

Will investors allocate more to emerging markets given the sudden spike in Covid-19 cases in the West?

Flows to emerging markets (EM) funds have retained their momentum in the early fourth quarter of CY20. The third week of October saw EPFR-tracked emerging markets equity funds extend their longest inflow streak since a 13-week run ended in mid-January. Emerging markets bond funds pulled in over $2 billion for the third week running, as investors rebuilt the positions they slashed between March and May. They still have a way to go. From peak to trough, investors redeemed over 9 per cent of the assets managed by EM bond funds going into the Covid-19 pandemic versus just under 4 per cent for all developed markets (DM) bond funds, while the figures for EM and DM equity funds are 4.7 per cent versus 1.25 per cent. With growth in developed markets under pressure from the rising Covid-19 caseload, investors will keep paying more attention to emerging markets.

Do you expect the rally in the American markets to fizzle out in case the US presidential election does not see Donald Trump coming back to power?

No. A Biden victory with the Republicans retaining control of the Senate would, I think, be well received as it would be interpreted as setting the stage for expansionary, but not reckless fiscal policy. A Democratic sweep — the so-called ‘Blue Wave’ — is likely to check things until the market gauges just how left-of-centre the new administration will be.

How will the global markets and big money move in case Joe Biden occupies the White House in a few days from now?

The composition of Biden’s Cabinet will be the key driver of market sentiment. Biden’s stamina remains a real issue, and many people believe those he appoints will have a much freer hand than is often the case.

Could India attract incremental foreign flows over the next few months?

For the moment, India is the odd one out in what is generally a favourable view of Emerging Asia. The trajectory of the Covid-19 pandemic in India compared to its regi­onal peers is the obvious point of difference.

Do you see money move into cyclical stocks in India from the defensive plays as the economic recovery gathers steam?

The biggest rotation among Emerging Asian funds has been from financial to information technology (IT) and consumer discretionary stocks, with allocations to health care and industrial plays beginning to pick up some momentum in the third quarter. Given the focus on the pandemic’s second wave in the northern hemisphere, the recovery is showing signs of losing steam there — which has global implications. So, the move from defensive sectors to growth-oriented ones may be checked going into the New Year.

What’s your view on how global central banks have responded and what more do you expect over the next few months?

Central banks res­ponded wi­th real energy, and have certainly answered the question that lingered after their battle with the Global Financial Crisis (GFC): Do they have any ammunition left? But their options, such as negative interest rates, offer diminishing returns. Central banks will play a firefighting rather than trailblazing role over the next six months, as they wait for the fiscal responses to play out.

Is it time to switch to debt funds?

Mutual investors have already made that choice, aided in their decision by the implicit US Federal Reserve (US Fed) and European Central Bank (ECB) puts in key segments of the market. Over $600 billion has flowed into EPFR-tracked bond funds over the past six months. However, since a key plank of central bank policy is to chase capital into more dynamic areas of their economies, moving to debt does carry a whiff of fighting city hall.

Exchange-traded funds backed by physical gold and silver accumulated over $50 billion of bullion this year. Do you see this pace continuing?

That flow, at least from a mutual fund perspective, has slowed in recent weeks. Investors remain worried about inflation and the outlook for fiat currencies, and I expect they will continue to rebalance their portfolios in favour of precious metals. That translates into a positive trend overall, but more variance week-to week.