 "Among the fragile five, India is the worst-placed: Jan Lambregts & Michael Every")
With two key events, the US Federal Reserve's stance on tapering of the bond-buying programme and Reserve Bank of India (RBI)'s review of the monetary policy, behind, investors are eagerly awaiting the outcome of the general elections, which could see reforms getting back on track. Jan Lambregts, managing director and global head of financial markets research, and Michael Every, head of financial markets research for Asia-Pacific, Rabobank International, suggest Indonesia seems far more likely to get a positive election result among poll-bound emerging markets, in a conversation with Puneet Wadhwa. Excerpts:
What is your interpretation of the latest statements coming from the US Federal Reserve? Is the recovery stable enough for it to hike rates?
Jan Lambregts: Most attention in the wake of the last FOMC (Federal Open Market Committee) meeting was drawn by the Q&A session, where Fed Chair Janet Yellen spoke unusually frankly about a six-month period between the end of tapering and the first rate hike.
We think the market has been reading too much into this and would emphasise the Fed retains considerable flexibility as to when it pulls the trigger on an actual first rate hike. The economic recovery is real, but rather modest, and the first rate rise is still likely to be as far away as H215.
How big is the geopolitical risk? What is your interpretation of the economic data from China and Europe and their implication for the world economy and markets?
Jan Lambregts: Geopolitical risk looms large at the moment, whether that's risks surrounding the situation in Ukraine, the South China Sea or Venezuela. Geopolitical developments by their very nature are difficult to forecast. What can be tracked better are the economic prospects of China and Europe.
Europe is enjoying a moderate recovery, which has helped the financial markets forget about the debt crisis. Economic growth is likely to be low in the euro zone on a long-term horizon, bearing in mind demographical pressures, relatively low capital investments and productivity challenges.
China's moderately slowing down at the moment in real terms, but in nominal terms GDP (gross domestic product) has fallen very rapidly over the past two years. The real danger for China is that growth has become increasingly reliant on debt financing. If the government doesn't address this seriously, reform and accept lower growth now, they risk a broader crisis further down the road.
How do you evaluate the prospects of India as an investment destination, given its set of economic challenges among the fragile five - Brazil, Indonesia, South Africa and Turkey?
Michael Every: Among the fragile five, India is among the worst-placed at present. There has been little underlying improvement in macroeconomic imbalances, and we are all waiting to see if the new government is serious about addressing these long-standing issues or not.
That is not to say that the other four are angels, but India could face a serious backlash from investors if they believe that it is not going to act soon.
What is your interpretation of the latest statements coming from the US Federal Reserve? Is the recovery stable enough for it to hike rates?
Jan Lambregts: Most attention in the wake of the last FOMC (Federal Open Market Committee) meeting was drawn by the Q&A session, where Fed Chair Janet Yellen spoke unusually frankly about a six-month period between the end of tapering and the first rate hike.
We think the market has been reading too much into this and would emphasise the Fed retains considerable flexibility as to when it pulls the trigger on an actual first rate hike. The economic recovery is real, but rather modest, and the first rate rise is still likely to be as far away as H215.
How big is the geopolitical risk? What is your interpretation of the economic data from China and Europe and their implication for the world economy and markets?
Jan Lambregts: Geopolitical risk looms large at the moment, whether that's risks surrounding the situation in Ukraine, the South China Sea or Venezuela. Geopolitical developments by their very nature are difficult to forecast. What can be tracked better are the economic prospects of China and Europe.
Europe is enjoying a moderate recovery, which has helped the financial markets forget about the debt crisis. Economic growth is likely to be low in the euro zone on a long-term horizon, bearing in mind demographical pressures, relatively low capital investments and productivity challenges.
China's moderately slowing down at the moment in real terms, but in nominal terms GDP (gross domestic product) has fallen very rapidly over the past two years. The real danger for China is that growth has become increasingly reliant on debt financing. If the government doesn't address this seriously, reform and accept lower growth now, they risk a broader crisis further down the road.
How do you evaluate the prospects of India as an investment destination, given its set of economic challenges among the fragile five - Brazil, Indonesia, South Africa and Turkey?
Michael Every: Among the fragile five, India is among the worst-placed at present. There has been little underlying improvement in macroeconomic imbalances, and we are all waiting to see if the new government is serious about addressing these long-standing issues or not.
That is not to say that the other four are angels, but India could face a serious backlash from investors if they believe that it is not going to act soon.
The RBI has kept key rates steady in its bi-monthly review of the monetary policy. What is your view on how interest rates and bond yields will pan out globally and in India going ahead?
Michael Every: In terms of interest rates, that depends on whether the RBI is allowed to target CPI (consumer price inflation) or not. The fact that even this kind of fundamental issue still is not decided conclusively is indicative of India's problems.
However, any monetary looseness at the short-end of the curve will only be punished more at the longer end of the curve failing serious reform efforts. That is especially true given the overall global backdrop of the US Federal Reserve starting to gradually normalise its monetary policy.
Why do you think India escaped the rout among the emerging market (EM) currencies after the US Fed's announcement on its bond-buying programme in December? What is the road ahead for Asian currencies, especially the rupee?
Michael Every: The sell-off was seen earlier in the year, and by December, the market had already grasped the "tapering is not tightening" message, so most EM had a generally calm response to the start of the QE removal process.
However, in the long-run that trend is still bad news for Asian EM, especially as US growth is not consumer led (the US current account deficit is the lowest since 1998 at present). As such, there will be a downward path for most Asian EM FX, with the speed of that decline depending on local fundamentals. INR could sell off markedly if we get an inconclusive or negative election result.
Do you think that India is better placed as compared to the other emerging markets/countries that are poll-bound in 2014? How worried are you as regards the election outcome in India and what impact we may see on the macros, policy reforms and eventually the implications for the economy and markets?
Michael Every: No, regrettably. Indonesia in particular seems far more likely to get a positive election result.
How would you allocate resources now given that we have already seen a rally in the risk-on asset class? Would you use this opportunity to add on to your risk or equity positions?
Jan Lambregts: We believe the Great Flotation, in which central bank liquidity was lifting nearly all asset classes, is turning into the Great Rotation against the backdrop of a moderate global recovery. In such an environment, investors will shift further from risk-averse assets (like bonds) into risk-seeking assets (such as asset markets).
This leaves a still positive outlook for equity markets in general, for even as P/E multiples have steadily risen and these markets have benefitted from the liquidity tide, a genuine recovery should help boost risk appetite. However, the switch out of the Great Flotation also implies a return of the discerning investor. Investors are still hungry for yield and haven't abandoned emerging markets across the board.
The discerning investor has begun to look at fundamentals again, however, so emerging markets that haven't done their home work in past years are now vulnerable. Whereas those that did, stand to benefit in relative terms.
Michael Every: In terms of interest rates, that depends on whether the RBI is allowed to target CPI (consumer price inflation) or not. The fact that even this kind of fundamental issue still is not decided conclusively is indicative of India's problems.
However, any monetary looseness at the short-end of the curve will only be punished more at the longer end of the curve failing serious reform efforts. That is especially true given the overall global backdrop of the US Federal Reserve starting to gradually normalise its monetary policy.
Why do you think India escaped the rout among the emerging market (EM) currencies after the US Fed's announcement on its bond-buying programme in December? What is the road ahead for Asian currencies, especially the rupee?
Michael Every: The sell-off was seen earlier in the year, and by December, the market had already grasped the "tapering is not tightening" message, so most EM had a generally calm response to the start of the QE removal process.
However, in the long-run that trend is still bad news for Asian EM, especially as US growth is not consumer led (the US current account deficit is the lowest since 1998 at present). As such, there will be a downward path for most Asian EM FX, with the speed of that decline depending on local fundamentals. INR could sell off markedly if we get an inconclusive or negative election result.
Do you think that India is better placed as compared to the other emerging markets/countries that are poll-bound in 2014? How worried are you as regards the election outcome in India and what impact we may see on the macros, policy reforms and eventually the implications for the economy and markets?
Michael Every: No, regrettably. Indonesia in particular seems far more likely to get a positive election result.
How would you allocate resources now given that we have already seen a rally in the risk-on asset class? Would you use this opportunity to add on to your risk or equity positions?
Jan Lambregts: We believe the Great Flotation, in which central bank liquidity was lifting nearly all asset classes, is turning into the Great Rotation against the backdrop of a moderate global recovery. In such an environment, investors will shift further from risk-averse assets (like bonds) into risk-seeking assets (such as asset markets).
This leaves a still positive outlook for equity markets in general, for even as P/E multiples have steadily risen and these markets have benefitted from the liquidity tide, a genuine recovery should help boost risk appetite. However, the switch out of the Great Flotation also implies a return of the discerning investor. Investors are still hungry for yield and haven't abandoned emerging markets across the board.
The discerning investor has begun to look at fundamentals again, however, so emerging markets that haven't done their home work in past years are now vulnerable. Whereas those that did, stand to benefit in relative terms.