 "Fredric Lebel")
Emerging markets, including India, are being influenced by their own condition, rather than a tapering of the US Federal Reserve’s monetary stimulus, says Frederic Lebel, the co-chief executive officer and chief investment officer of OFI MGA, the France-based hedge fund, one of the arms of OFI Asset Management. Lebel, who also owns Geneva-based HFS Hedge Fund Selection S.A with assets of over euro 1 billion and sits on the board of governors of the CFA Institute, speaks to Sneha Padiyath about the investment outlook for India, gold and oil. Edited excerpts:
What is your investment outlook for India? Do you think the worst is over for the economy?
Inflation is a big problem in India. It is however a well-known problem, not something people recently discovered. It is also a typical problem across emerging markets, not India-specific. Actually, India is not that different from many other EMs, which also suffer from rising inflation, decelerating growth and political tensions.
People able to adopt a long-term perspective and be contrarian might well look at India today. Few can and do; lots cannot and leave or have left by now. I would rather be constructive on India in the current context. The fact is, many want to avoid EMs markets right now and, indeed, if you do not have a long-term view, you probably would not want to be here in the short term.
Now that the US Federal Reserve has started partial withdrawal of its stimulus programme, QE3, how do you expect it to impact EMs such as India?
I do not think tapering has much to do with the EMs any more. EMs are greatly influenced by their own situation and not as much by the tapering in the US. Actually, the tapering effect has been integrated into prices over the past seven months to a large extent.
Second, countries avoiding a massive crisis, especially on the currency side, will continue to be attractive from a growth comparison with the developed markets. India, from a growth standpoint, looks pretty strong and much stronger than many other EMs. The diversity of the Indian equity market is pretty large, not the case for many other markets.
Is the market downplaying the possible impact of a stronger dollar?
I am not sure. Currency moves are tough to predict, though many try. (Interest) Rates in the US are likely to stay around zero for a long time, for another 18 months or even more. If you look at short-term rates in India, these are quite high. As everyone is bearish on the currency, the cost of the negative carry plays a crucial role. To get the trade right, one has to catch the move and close the position. If you don’t catch it right, you will bleed because you will have to pay the interest rate differential, which is very steep.
Do you expect developed markets such as the US to outperform developing markets? If the US economy continues to strengthen, could there be outflows from EMs?
There are two schools here. One is the momentum school, which says the US will grow strongly in the context of lower global risks. Then, there is the reversal school, which says last year's losers will rebound.
If you are thinking that momentum works, then you probably don’t want to be out of the markets that worked last year and, thus, favour the developed markets. You want to be in US and European equities. Probably, you don’t want to spend too much time talking bonds and you certainly don’t want to catch the proverbial knife in EMs.
Now, if you are more of a contrarian and convinced of reversion to the mean, you would be moving away from markets that worked well last year. You would notice that the under-current in the US market is not that strong. While prices go up, volume does not. So, the participation of market participants is low. As a reversal-conscious investor, you would be getting wary that you are paying expensive prices for a market that has gone up very much.
Do you think gold prices will continue to decline?
Gold saw a correction of about 30 per cent last year. However, compared to the start of its rise in 2001 to now, it has gone up about five times. So, you could argue it is a sharp correction but still in a bull market.
Second, fund managers view gold as a currency and an insurance policy. Most don’t hold gold for any other reason. They don’t really look at demand or supply. One reason why gold has been hit currently is because of India, where the demand was cut as a result of foreign exchange controls.
Now, for gold to go up significantly and make new highs, you would have to have people switching from other currencies like the dollar, the euro, the yen, and into gold, as they lose faith in fiat currencies. Only in such a scenario, would I expect gold to go back up significantly. Otherwise, it would have to be rather range-bound.
What is your view on crude oil prices?
Most likely be stuck between $80 (a barrel) as the floor and $120 as the ceiling. So, basically, the buying countries cannot take more than $120 a barrel without their economies slowing and the producing countries will not accept prices below $80 without cutting production. At $120, many would try and look for substitutes, which makes a lot of sense, too.
Will shale gas production impact oil prices?
Shale gas production does impact but there is a difference between shale gas and shale oil. Shale gas prices vary greatly in various locations; in the US it is around $4 while in Japan it is $17 per btu. Not everyone has shale gas nor is allowed to extract it. It is only produced in certain parts of the world – East-coast of the US, China, Argentina, Russia and former satellite countries of the Soviet Union.
So for as gas goes, the long-term story is for prices to converge. While it will rise in the US, it is likely to come down in importing countries such as Japan. Yet, the convergence will be slow and only maybe visible in five years. Oil will most likely keep in its $80-$120 range during that period and be unaffected.
