'India won't be totally unaffected by a slowdown in the US'

Q&A: Professor Dr Lex Hoogduin

As the chief economist and head of IRIS, the joint research institute of Rabobank and Robeco, one of the things that Professor Dr Lex Hoogduin does is explore new investment themes that are likely to do well. "Scarcity in Abundance: Investing in New Scarcities" is one theme he feels is likely to catch up given major changes in the world "� demographic and climate change. In India, to make a presentation on the longer-term outlook for the global economies, Hoogduin spoke to Priya Nadkarni on why emerging economies will continue to be attractive investment destinations despite sharp corrections in some of the markets. Excerpts:

How do you look at the Indian market in the context of the current global conditions?

At the moment, we are overweight on emerging economies because we favour a mild form of the so-called decoupling thesis. We feel there is a slowdown in the US. It is on the verge of recession if it is already not in one. The interesting thing is this time it will be different from the past when there was a slowdown in the US.

There are two theories of decoupling "� one, the stronger one that says that all the rest of the world will not notice the slowdown, but I think that is too strong. The world is more and more integrated now.

I believe in the weaker one "� the impact in this cycle will be less than what it was in the past. Emerging economies may continue to grow even if there is a slowdown in the US.

There will be some slowdown in growth in India since India will not be totally unaffected by what is happening in the world economy, but it will not be as much because of its relatively low exposure to exports to the US compared to some other emerging economies.The strength is also the expected corporate growth.

On the weaker side, even after the stock market correction, valuations are still relatively high compared to those in other emerging economies. In our portfolios, among emerging economies, we have kept a neutral stance on India.

Which economies are you overweight on among the emerging market pack?

Brazil. It has done very well last year. Inflation has come down very quickly. They have the benefit of high and strong commodity prices and they are not as dependent on the US for export growth as Mexico.

The other favourite is East Turkey, although we are a bit more hesitant there because of the political conditions. But it has done much better in its macro-economic development.

Has there been a shift among global investors from economies like India and China to Brazil and Russia in terms of the allocation that they have in their portfolio?

Yes, some of them have. But these are more cyclical movements that you will see from time to time. I don't expect these to be permanent. The permanent thing is that there is an important shift from developed to emerging economies.

Even in the US, I see people investing more and more overseas. Now they are more and more focused on investing outside. Even US companies are more and more dependent on profits from their subsidiaries outside.

Where do you see the commodities cycle right now?

We take into account three major trends in the world. One is the rapid growth in world population. The second is urbanisation. You will see more people living in cities. In fact, more people will be living in cities worldwide than in the countryside for the first time in history. The third one, not relevant in the Indian context but one of India's strengths, is ageing.

If we take these things together, they indicate a fairly strong growth of demand for essential goods and services, while at the same time, the market supply has difficulty catching up. We think about six markets for primary goods and services "� commodities, energy, food, clean water, clean air and healthcare.

Commodity prices, on an average, will gradually climb in a trend-wise way. We are aware also that like in the past, commodity prices will move in cycles.

It may well be that you may see a drop from the current levels, but, of late, commodity prices are also influenced by inflation expectations. Inflation expectations have gone up and people try to hedge by buying commodities. From a longer-term perspective, it will be an upward trend.

Would you be introducing theme-based products in India?

What we have in mind is to introduce a blend of products along with Canara Bank. Products that will, on the one hand, invest in themes and, on the other, blend local expertise.

What are some of the sectors that you would bet on at this time?

We advise investors to gradually increase their investments in emerging markets. We have different funds and every fund has an investment team that manages and they make their own choices. Globally, we are positive on base materials and industrials because of the huge demand for infrastructure.