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Where would you place your bets between the developed markets (DMs) and emerging markets (EMs) over the next 12–18 months?
In general, we feel world economic growth will move in a positive direction. We do have some issues around the globe and there are discrepancies between regions and countries. If we put these together and create a portfolio on where we want to invest, we remain underweight on EMs. We prefer, at present, to invest in the DMs.
Would you elaborate?
It is very much a valuation game. We're overweight on Europe; we think it's a very good place now to be. We see more value there than in some EMs. We had a fantastic rally in the US last year and we were overweight on the US then. However, we are underweight on the US now. We are also underweight our home markets and prefer Europe and Japan from an equity market perspective.
The Dow Jones Industrial Average touched 17,000 for the first time, on the back of the jobs report. Isn’t that a sign of optimism that the US economy could be on a rebound and one should increase exposure, rather than remain underweight?
If we see higher equity prices, we need to see some very good top-line growth for corporates. The beginning of the season has showed that companies have delivered as expected. However, Europe still offers a better investment alternative. We don’t think the US markets will see a secular bull run.
What’s keeping you away from investing in EMs?
We see some political issues in different EM countries. But, again, there are different issues within each economy. Within EMs, we prefer to be in Asia and the Far East and will remain underweight on Latin America and Africa. That’s how we view the world right now.
Your specific reasons for being underweight on EMs?
Political risk is one of the biggest. In many countries, we don’t know what the future holds. In Brazil, for instance, the elections are coming up and we don’t have clear visibility on how their markets will develop and the underlying structure of their economy and the political framework will pan out. It is a different case in the Far East and Asia where we can see some more political stability, especially in India. It is mainly because of this risk that we are underweight on EMs. Also, in some cases, the valuations appear stretched.
Anything beside the political risk?
No. For us, that’s the most important factor right now and we need to be certain on how this will pan out in many countries before we advise clients to take equity exposure in EMs.
At a global level, what are the key investment themes or sectors you like?
At present, we’re only looking at stability as a theme. It’s what investors should look for. We advise clients to pick companies that could be buoyant but are stable and have growth potential. We believe volatility is here to stay and that’s why we think investors should bet on stability, instead of chasing high fliers.
In terms of sectors, we find a lot of value in utilities and information technology companies.
How does India fare among the EMs? What are the key concerns and which checkboxes have you ticked in terms of what you want changed or an improvement?
Well, the political stability checkbox has already been ticked and so has the political will to implement key reforms. We don’t have any preference on whom we'd like to see at the Centre but what we like to see is stability. The landslide victory in the recent general elections is a sign of stability for the new government.
For the longer run, say 12–18 months, we remain optimistic on India because some of the structural reforms will probably come through. At least, this is what we heard from Mr (Narendra) Modi before the elections and what we expect now. It is also clear that there has been a lot of interest in India already and the markets have already run up. In general, this will make many investors in my part of the world pause before committing any fresh money into India.
How much importance are you giving to geopolitical risk while taking an investment call?
Until now, everyone seems very calm about the geopolitical risk and what’s happening in Syria. We are a little troubled with the fact that nobody really cares.
With an over 20 per cent rally in 2014, Indian markets have been the best performers globally. Do you think the macro economic headwinds are already inbuilt into the current market levels and valuations or can one expect some shocks ahead?
From what I interpret, a lot of good news is already inbuilt. To rise further from this level substantially, we need to really see some positive initiatives from the government and an improvement in the macro economic numbers. Our strategists believe the good news is already factored in.
What all could go wrong for India from here on?
One is from the external side, the oil prices. If oil prices climb, it will hurt the Indian economy and make it more difficult for Mr Modi to implement his plans. From what I gather, I expect Mr Modi to deliver on his promises. From what he has done in Gujarat since the past 10–12 years, there is no reason to expect he will not deliver at the country-level. We also have fears of a deficient monsoon this year that could play spoilsport.
How do you see the debt markets? Is the debt story dead, given the bullishness now seen for riskier assets?
We play a barbell strategy. We are overweight on cash and high-yield assets. However, we are underweight on government bonds. In the western part of the world, where we have more clients, we don’t see value in government fixed income and investment grade securities. The spreads in investment grade are too narrow. We expect the low interest rate regime in Europe will stay for at least the next two years. Hence, we don’t see any value in investing in government bonds. We believe corporates in the US and Europe are in good health and the debt they'd issued will mostly be served.
The new government will present its maiden Budget in a few days. What are your expectations?
We hope the finance minister does put forward a realistic Budget. The government has already taken some stiff measures ahead of the Budget. He should continue with subsidy removal; he should continue with the measures targeted at controlling prices and inflation. He should also continue to work on structural measures that could make things easier for companies abroad to set up base or a franchise in India. Infrastructure is another area that needs attention.
The government has made its mind clear on opening of the retail sector. Isn’t that sending confusing signals, since you expect more companies to set up franchise or a base in India?
Well, the government needs to address issues in a phased manner. The most important is that they take immediate action on subsidies. The government can’t do everything in one shot; the process has to be gradual. But what we feel is that the government doesn’t need to be populist and put forward a Budget that will please people. Modi can rise on his success and take tough measures right now and leave populist measures for later, when he needs to get re-elected.
