The worst seems to be behind us. There is enough commitment from the European Central Bank and the Germans. They want the euro to continue to exist, says Pedro Bastos, CEO, HSBC Global Asset Management, Brazil, in a conversation with Ujjval Jauhari. Edited excerpts:
The worst seems to be behind us. There is enough commitment from the European Central Bank and the Germans. They want the euro to continue to exist, says PEDRO BASTOS, CEO, HSBC Global Asset Management, Brazil, in a conversation with Ujjval Jauhari. Edited excerpts:
What is your view on equities in the emerging markets (EM) now? We had seen a sharp run-up from January before the rally fizzled out.
India and Brazil saw a rally during January and February as both the markets saw a little less of risk aversion and strong inflows. However, in late March and early April there were outflows, basically due to issues regarding Spain.
Compared to India, Brazil is volatile because it is a very liquid market. However, you should not panic with the EMs. On the contrary you should take advantage of those opportunities.
What are the risks emanating from the scenario in Europe and the US?
I think the worst is behind us. There is enough commitment from the European Central Bank and the Germans. They want the euro to continue to exist. They realise that the cost for industrial slowdown fracturing Germany will be too high to bear. We know that Spain is a serious concern. But there is going to be a long-term deleveraging process. Trying to curb fiscal standings is not to be done overnight.
We don’t have high expectations from Europe. We see the US slowing down a little, but they will not go into recession, though it may be a very slow recovery. China too, is going through a soft lending. Given the entire buffer that China has in terms of the reserve requirement, they will be able to manage the transactions.
What are the key challenges that the EMs face?
The bigger problem and higher risk to EMs is posed by inflation. Driven either by rising commodities or food prices, inflation is something we have to watch very cautiously. The ability of governments and central banks to control each one’s economy will be watched closely. Every EM will have a different story.
How are the various countries in EMs placed in terms of valuations and prospects?
Brazil has always traded at a discount and we are currently trading at 1.7x the book value and 10.5x one-year forward earnings (PE). This is a significant discount to India. The reason is simple. One, as commodity producing companies have lower PE that brings down the average. Also, the fixed income spreads are very high, and so, the risk premium of Brazil increases that brings the valuations at discount.
Mexico is also becoming interesting because it is a play on the US recovery. Improvement in the US should help them. The other reason we look at Mexico is it has significantly brought down cost of production vis-a-vis China. So, many companies prefer to relocate to Mexico.
What will be the outlook of foreign investors towards developing markets viz-a-viz developed economies?
Global investors are becoming more selective in terms of their choice of economy. Last year, there was a choice between developing markets versus emerging markets type of trade. That is going to change in 2012.
Individual stories and drivers for each economy are going to start speaking louder. It’s going to be very attractive growth patterns for the countries which can offer that.
What is your view on crude oil prices? Do you see them softening and what impact do you see on the emerging markets like India?
I do not see crude oil prices falling below $100 a barrel in the near-term on the back of a gradual rise in automobile sales — be it India, China, Russia or Brazil. They can come down only if we have a major crisis like 2008, which is most unlikely.
However, in terms of impact, India, which is a net importer, may have to worry more. Brazil is a net exporter with production of around 2.2 billion barrels a day and plans ramping up production to five billion barrels a day by 2020. But I think the bigger problem for emerging markets is tackling inflation.
