 "Benjamin Yeo")
Indian markets have corrected nearly 10 per cent from their peak levels led by a host of global and domestic reasons. Singapore-based Benjamin Yeo, managing director & chief investment officer (Asia & Middle-East) for Wealth & Investment Management, Barclays, tells Puneet Wadhwa that he expects volatility to rise, especially closer to the US Fed's monetary deliberation meetings. One should not be surprised to see some slowdown in the pace of foreign institutional investor (FII) flows into India in the second half of 2015, he says. Edited excerpts:
What is your interpretation of the latest statements from the US Federal Reserve?
The focus remains unchanged; essentially their eyes are on the US domestic economy, in particular the pace of improvements in terms of economic activities and labour market. Notably, the Fed cannot deny that unemployment has already more than halved from its recent high and that wage increases could also be in the pipeline. Our view is that the Fed should start the first rate hike in the second half of the 2015; all in all, we think the coming monetary tightening cycle is likely to be less severe in terms of magnitude and pace, as inflation has yet to rear its ugly head.
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Volatility is likely to be on the rise and especially closer to the Fed's monetary deliberation meetings. Thus far, markets have inadvertently been pricing in the first rate hike; and so when it eventually happens, any negative impact is likely to be short-lived and fairly muted, similar to the experience we recently had regarding the taper tantrum in 2013-2014.
The negative impact on India may also be less severe than before for good reasons: fund may not necessarily rush back to the US despite the expected stronger dollar, as the US equity valuation remains at stretched levels; conversely, Indian stock prices have also become fairly attractive after the recent market correction.
What are the likely implications of 'Grexit' for the global financial markets?
Issues relating to Greece's potential default and exit from the European Union (EU) are not new; to a certain extent, they might have become red herrings in the making. In fact, recent surveys suggest that increasingly, the likelihood of a 'Grexit' has increased, as the consensus view is that it could happen over the next few years.
Suffice to note that the outlook for the region need not be dependent on what happen to Greece. In fact, the implicit support from the European Central Bank (ECB) remains key, in terms of easy monetary conditions. Thus, amid the noises emanating from Greece, there are already visible green shoots of economic improvements seen in the recent EU data releases, which bodes well for the regional and global economy in the coming quarters.
How does India appear as an investment destination? Do you see the pace of foreign institutional inflows slowing in the second half of 2015?
The effective implementation of these structural reforms is not a one quarter or one year phenomenon. After the initial euphoria, dust has settled down and investors are beginning to expect any concrete measures and improvements to be made by the Modi government. Undoubtedly, there will be disappointments and markets will correct. However, as long as investors perceive that the ruling party is still on the right economic direction and track, Indian equity will remain attractive in the medium term to investors.
Alongside current criticisms of the ruling party in terms of deliverables and the surge in interest towards Chinese equity in recent months, one should not be surprised to see some slowdown in the pace of foreign institutional inflows into India in the second half of 2015. Although it is not exactly a paired trade between China and India, at the margin, some funds may be diverted out of India into China, especially for those funds that have been overweight in India and underweighted in China - this should not be interpreted as a reversal of recent institutional inflows into India.
Have foreign investors come to terms with the fact that a pick-up in corporate earnings could take longer than expected?
Historically, among the bigger economies and countries in Asia, Indian equity has always commanded a higher earnings multiple. One of the reasons which explains the higher multiple is the ability of Indian corporations to convert its top-line, revenue growth into bottom-line, profit growth with a good level of transparency. That said, the consensus expects India to deliver a better rate of economic growth this year versus China or even Indonesia. If that holds true and external global environment permits, Indian corporations could see some improvements in earnings trajectory in the coming quarters.
Do you expect central banks in Japan, China and Europe to wind down the quantitative easing / stimulus programmes over the next couple of years? What is the likely impact of this on the global markets?
Historically, no central bank in the world pursues a loose monetary policy stance for an indefinite time; if they do, the world would be in a serious state of recession, deflation and structural stagnation. In fact, taking a look at growth of the last 30 over years, it’s easy to conclude that growth remains the norm rather than exception. Even the currently challenged rate of global economic growth is nothing out of the ordinary as it is in line with historical growth trend which goes a long way to refute the theory that we are going into a new normal of low growth rates.
Thus, when the economies in Japan, China and Europe can stand on its feet and the economic momentum and recovery become more entrenched, the easy monetary policy stance alongside the associated quantitative easing programs will eventually be wound down. Invariably, there will be periods of heightened volatility in the global capital markets when the music stops. However, central banks – clearly illustrated by the US Fed currently, have learnt from previous tightening cycles to be more communicative in its guidance. With inflation expected to remain fairly benign in the coming years, any moderation in monetary conditions is likely to be on a fairly managed trajectory and therefore, it’s hard to see the global capital markets going into any tailspin.
Are the Chinese markets in a bubble-like situation?
Even after the recent sharp rise, valuation of Chinese equity – whether H or A shares – remains attractive. On price-earnings ratio, they have moved up from around 9x to around 12 – 13x currently – tellingly, A shares trade on a higher multiple than H shares. Such valuation level does not smack of any bubble in the making and therefore, the positive momentum can possibly continue when compared to the valuation of the US and overall emerging market valuation.
How would you allocate resources now given that we have already seen a rally in the risk-on asset class? Would you use this opportunity to add on to your risk or equity positions?
On a strategic basis, our asset allocation prefers equity to bonds; within equity, we are overweight developed market equity and underweight emerging market equity. However, tactically we would prefer Asia emerging market equity within the emerging market category in view of favourable demographics and valuation. Thus, we advise investors with a longer time horizon to accumulate the emerging markets in Asia.
However, at Barclays we continue to advise that clients hold a fully diversified portfolio of bonds, equity, commodities, real estate and alternative trading strategies. Given our current higher-than-normal level of cash allocation, we would not be adverse to bargain-hunt on any market weakness on the horizon, especially in equities.
Do you see dollar gaining more strength? Some experts see it going past 100 against most global currencies. What’s your view?
The arguments for a stronger dollar are clear, especially on counts of positive inflation and interest rate differentials. Specifically, we think the US dollar has just started on a new path of currency appreciation and we are nowhere near its end; although the DXY index has retraced from 100 to 95 currently, we think this correction is temporary and the uptrend remains intact. Longer term, we would not be surprised to see the DXY index exceeding the 100 level mark; in fact, the 120 level also looks entirely possible.
