 "Andrew Freris")
It has been an eventful October for the global markets given the developments in the US. The remaining half promises to be equally action-packed given the fast approaching US debt ceiling followed by the FOMC (Federal Open Market Committee) meet, which will have a bearing on how investors position themselves across asset classes. Andrew Freris, Chief Investment Strategist (Asia), BNP Paribas Wealth Management talks to Puneet Wadhwa on his expectations from these events and how the Indian markets and economy is positioned amid all this. Edited excerpts:
How concerned are you about the US government's partial shutdown and the fast approaching debt limit in mid-October? What are the likely implications for the global markets?
This is not an issue of concern about the US government but the concern is that the markets will not wait till there is default. What is being missed here is that the markets will not wait to see the default and then react. As the default is technical and not real, the impact will be unpleasant but temporary, higher UST (United States Treasury) yields and lower equity prices with a weaker US dollar.
Will it have a bearing on the US Federal Reserve's tapering off plans for the QE? Why / why not? Are the macros strong enough for the US Fed to go ahead with the taper plan?
The longer it takes for resolution for the fiscal crisis – both the budget and the ceiling – the greater the impact on GDP (gross domestic product), albeit mild. There is the added issue that all this will distort short-term trends and delay the issuance of stats and hence force the US Fed to delay tapering. So, this is another "good bad news."
The global markets' reaction to the shutdown has been mild. Is this a lull before the storm? What steps should India take to minimise the impact?
The market in the past reacted viciously with days of delay. After the US was downgraded in September 2011, the S&P fell by 20%, only to recover days later. There is nothing India can do. Any action would be premature.
In your opinion, has the quantitative easing done more harm to the global markets than good given that its winding up now is causing so much pain across the globe, especially the emerging markets?
Under the circumstances, it is difficult to see what else the US Fed could have done. I don't think that QE has done any damage to the Asian markets. This is the continuation of the myth that we rely/depend for everything on the US. We don't.
The impact of the US QE on China's economy or for that matter on India's economy has been minimal. India's fiscal deficit, current account deficit (CAD), high food inflation and policy paralysis has nothing to do with the US QE. Let us stop blaming the Yankees for everything.
China's economy is largely a domestically driven economy with exports playing a minor role. The QE did impact financial markets by keeping benchmark rates low, but this did not stop the Reserve Bank of India (RBI) from hiking rates or Bank Indonesia from doing likewise. Australians have 2.0% rates when the Japanese have got zero and the Fed 25 bps (basis points).
The QE may have shifted curves down but may not have changed the differentials. Equities markets are interconnected but we do know that their dynamics do not reflect macro differentials.
Is there another 2008-like crisis situation in the making? And which asset class is most likely to cause this?
No, the situations then and now are totally different.
Are you upbeat about the prospects of any EM economies? Which economies in particular are likely to show good growth?
Yes, I believe China, Philippines, South Korea and Taiwan are likely to show good growth.
Could the economic developments in China be a party-pooper for the market rally, especially how the real estate prices and the other key macros are panning out? What about the euro-zone and Japan?
China's economy impacts raw material and food exporters and not the G3 economies. China is not and has never been the locomotive of global growth. How can China affect the "market rally" when its own equity market is still negative year-to-date? This is another myth difficult to kill off.
The euro-zone trades mostly with itself and hence cannot be driven by “global” exports while Japan is now driven by totally domestic factors. There is no such thing as global synch. It is all unconnected, except in the equities markets and fixed income. Remember, macro trends do not affect capital markets in the short-or-medium run and this can lead people by seeing equity markets moving together to conclude that economies do. On the contrary, they don’t.
What are your projections for India for the next 12 – 18 months in terms of key macros?
The projections are quite poor. High inflation will keep rates elevated and elections will maintain policy paralysis.
Can the situation spin out of control? Do you see a strong case for a sovereign rating downgrade for India?
Yes, in terms of outlook but not in terms of India defaulting. That is not the case and has never been. India's problems are totally man made – fiscal deficit, poor policies, relatively closed economy etc, as India is not impacted by global events as much as people think.
