Apart from a weaker external environment, some countries in the emerging markets face domestic challenges, too, Alexander Treves, head (investments), India, Fidelity Worldwide Investments, tells Puneet Wadhwa. Edited excerpts:
How do you view the macro-economic developments across the euro zone and the emerging markets?
The uncertainty surrounding Europe’s sovereign debt crisis had repercussions on investor confidence in 2011 and is likely to continue to do so.
Apart from a weaker external environment, some countries in the emerging markets also face domestic challenges such as a correction in China’s property market, weaker investment sentiment in India, and high household debt weighing on consumption growth in Korea.
Do you think 2012 will again be a difficult year for the global equity markets?
We feel the risks that dominated 2011 will continue in 2012 and the year could be challenging particularly for Europe, as it faces twin prospects of a recession and a potential change to the current composition of the euro zone.
Our colleagues in Europe believe we are in the last leg of the sovereign debt crisis, and the closer that crisis moves to the core economies, the faster the move towards decisive action. In that sense, whether the euro zone breaks up or moves towards a credible fiscal union, 2012 is likely to be a challenging year — albeit the challenges will act as catalyst for resolution.
The second half of the year could bring in a more optimistic economic tone, particularly if against a backdrop of easing inflation offering the prospect of stimulus measures.
The long-term case for emerging markets is intact and the existence of a ‘two-speed world’ in economic growth terms is likely only to become more obvious. Investors should be alert to buying opportunities in emerging markets that allow them to increase exposure at attractive prices.
What about India?
In India, growth expectations have declined in line with the fall in industrial production, high funding costs, and slowing global economic growth. We hope the policy environment will improve with a marked deterioration in growth outlook, as that has historically acted as catalyst for the government to push tough reform measures.
That aside, a slower growth rate in India will still be considerably in excess of growth achieved in the developed world. Meanwhile, inflationary pressures have eased due to the higher base effect and a decline in food prices, although core inflation will continue to present a challenge and any renewed currency depreciation could offset softer commodity prices.
What more can markets / investors expect from the Euro-zone?
The lingering sovereign debt crisis does not have any quick-fix solution. The recent downgrades of some euro zone members confirm our view that we are seeing a general re-pricing of sovereign debt. This started with the weakest sovereigns such as Greece, but in the latter months of 2011 moved decisively to the primary bond issuers.
While there has been some improvement recently in spreads, aided by the ECB, we have had a disappointing start to the corporate reporting season. The picture in the US is more promising.
What are you advising your clients at this juncture? Are there any sectors in the Indian equity space where still find value from a medium-term perspective?
Notwithstanding the disappointment on the growth front, over time we expect India to continue to liberalise, offering a longer term supportive environment for the next round of economic expansion.
Against this backdrop, the first half of 2012 is expected to present an opportunity to build positions in high quality companies that have a long-term competitive edge, while prudently managing portfolio risk. Recent hiccups notwithstanding, long-term growth drivers remain intact. Favourable demographics, increasing urbanisation, low household debt and robust domestic consumption growth are all favourable trends that the market has increasingly chosen to ignore, offering an opportunity to investors.
The foreign institutional investors (FIIs) still continue to be fence sitters as far as bulk of their investment in India is concerned. What are the key things that can bring them back?
Over time foreign participation in the Indian equity market is likely to increase as India’s place in the global economy continues to gain importance. Nearer term triggers could include an easing in inflation enabling interest rate easing; a reacceleration in growth; and reforms which could begin to tackle some of the supply side constraints which are evident in the economy.
Do you think that the Reserve Bank of India (RBI) should cut interest rates now given that inflation is showing some signs of coming down?
While inflation is likely to ease going forward, not least due to the base effect, the RBI remains concerned by incipient inflationary pressures in the economy. Most market participants expect the RBI to cut rates during 2012; the key questions are the pace and extent of easing.
