 "We're unsure if the factors in recent global growth recovery are sustainable: Gary Dugan")
As the markets are expected to do well in 2014, it is time to hunt for cyclical sectors, where valuations are attractive and growth expected to return, led by improvement in the Indian economy. With these thoughts, Gary Dugan, chief investment officer, Asia and Middle East, RBS Wealth Division, spoke with Jitendra Kumar Gupta on where he’s advising clients to put their money and why gold could be a good investment. Edited excerpts:
What are the key risks ahead?
We hope there is no major liquidity or banking crisis in China. I think China could create some problems but these should be transitory. The next big risk could be the US. If its capital investment does not kick-start and wage growth does not get going, the recovery we’re currently talking about would not be sustainable. We might have a couple of good quarters, then sort of drift down, which would probably trigger further Fed support through a re-expansion of quantitative easing.
Do you think at current valuations and the economic environment, Indian markets can do well?
I find the India market slightly difficult. On the one side, you have part of the market trading at 20-30 times earnings. On the other, the rest of the market is trading at almost half the price to book. I think the market in aggregate is cheap at these levels. To us, the cyclical sectors are where the true value is. Many cyclical stocks are trading at eight to 10 times earnings, which is very cheap, particularly in the light of expected revival in the economy. We also favour some consumer stocks which could benefit from lower inflation and interest rates in the coming months. We might also be at a turning point for property developers.
A lot of this optimism seems driven by (revival in) economic growth. How realistic is it, given political uncertainty?
I simply cannot believe you have all the coal you might need but you cannot get it out of the ground because of the policies. You have enough electricity but it does not reach the right place and at the right price.
There are so many things you need to fix which do not depend on global growth. It is within the grasp of politicians to change the things that hold the economy and have dramatic positive impact on the financial markets. There are people and corporations abroad who are ready to make a long-term commitment to India, for 10 years or more, but are restricted because of the many things India still needs to fix.
Globally, too, talk about recovery is gathering, particularly in the US, Europe and China. How real is it?
We are certainly in a better place. First, we now have more growth, also reflected in higher bond yields globally. Second, the risk of some big global financial institutions going under was a very big problem; again, many of those risks have eased recently. Third, inflation in the emerging world seems to be coming down. So, a lot of things have changed in a positive way.
However, we are still not sure if these are sustainable. One of the things we tell our clients is that some of these problems in the developed world, like debt in the US and Europe, are still not solved. The US might not go back to the (annual) growth rate of 3.5 per cent; probably 1.5 per cent could the best. In Europe, if they achieve 1.5 per cent, that will be a big achievement. In my view, it is the emerging world that has got to see acceleration in the pace of growth.
The key to a sustained recovery is an increase in corporate spending, along with employment growth and wages.
The price of gold is near its cost of production. What does it mean that we do not have much downside or there is upside from here on?
There are two components. One, the marginal cost. The other is the cash cost, basically the day-to-day cost of production, at about $850 an ounce. If we add other costs, the actual cost is about $1,100. Gold prices can fall to a low of $850 if world growth came back and everything is fine, which one simply cannot say. We are advising clients to buy gold at around $1,200. There are many triggers that could take it to $1,300 and $1,400 this year and if a disaster hits, somewhere or anywhere, we could see even higher prices. But, I never encourage people to buy gold for returns. I think one should buy gold for safety.
What are the key risks ahead?
We hope there is no major liquidity or banking crisis in China. I think China could create some problems but these should be transitory. The next big risk could be the US. If its capital investment does not kick-start and wage growth does not get going, the recovery we’re currently talking about would not be sustainable. We might have a couple of good quarters, then sort of drift down, which would probably trigger further Fed support through a re-expansion of quantitative easing.
More From This Section
This is why I would say if you want to invest for a five-year duration, you need to be very cautious. In 2006-07, the US debt-to-GDP was 40 per cent. Today, debt-to-GDP in the largest economies is in the aggregate around 100 per cent. One can imagine the impact of another crisis in Western countries; many would be in serious trouble.
Do you think at current valuations and the economic environment, Indian markets can do well?
I find the India market slightly difficult. On the one side, you have part of the market trading at 20-30 times earnings. On the other, the rest of the market is trading at almost half the price to book. I think the market in aggregate is cheap at these levels. To us, the cyclical sectors are where the true value is. Many cyclical stocks are trading at eight to 10 times earnings, which is very cheap, particularly in the light of expected revival in the economy. We also favour some consumer stocks which could benefit from lower inflation and interest rates in the coming months. We might also be at a turning point for property developers.
A lot of this optimism seems driven by (revival in) economic growth. How realistic is it, given political uncertainty?
I simply cannot believe you have all the coal you might need but you cannot get it out of the ground because of the policies. You have enough electricity but it does not reach the right place and at the right price.
There are so many things you need to fix which do not depend on global growth. It is within the grasp of politicians to change the things that hold the economy and have dramatic positive impact on the financial markets. There are people and corporations abroad who are ready to make a long-term commitment to India, for 10 years or more, but are restricted because of the many things India still needs to fix.
Globally, too, talk about recovery is gathering, particularly in the US, Europe and China. How real is it?
We are certainly in a better place. First, we now have more growth, also reflected in higher bond yields globally. Second, the risk of some big global financial institutions going under was a very big problem; again, many of those risks have eased recently. Third, inflation in the emerging world seems to be coming down. So, a lot of things have changed in a positive way.
However, we are still not sure if these are sustainable. One of the things we tell our clients is that some of these problems in the developed world, like debt in the US and Europe, are still not solved. The US might not go back to the (annual) growth rate of 3.5 per cent; probably 1.5 per cent could the best. In Europe, if they achieve 1.5 per cent, that will be a big achievement. In my view, it is the emerging world that has got to see acceleration in the pace of growth.
The key to a sustained recovery is an increase in corporate spending, along with employment growth and wages.
The price of gold is near its cost of production. What does it mean that we do not have much downside or there is upside from here on?
There are two components. One, the marginal cost. The other is the cash cost, basically the day-to-day cost of production, at about $850 an ounce. If we add other costs, the actual cost is about $1,100. Gold prices can fall to a low of $850 if world growth came back and everything is fine, which one simply cannot say. We are advising clients to buy gold at around $1,200. There are many triggers that could take it to $1,300 and $1,400 this year and if a disaster hits, somewhere or anywhere, we could see even higher prices. But, I never encourage people to buy gold for returns. I think one should buy gold for safety.