Gold Silver Reports — See Pullback in Short Term; Fed may Raise Rates in Dec — India is a good long-term story, but after the strong run-up in emerging markets it wouldn’t be surprising if there is some pullback in the short term, says Geoff Lewis, global market strategist, capital markets group, Manulife Asset Management.
The selection of Urjit Patel as the Reserve Bank of India governor suggests policy continuation and the passage of Goods and Services Tax Bill are positives, but more needs to be seen in terms of a pickup in earnings and private investment, Hong Kong-based Lewis tells Sanam Mirchandani. Edited excerpts:
What is driving the emerging markets rally?
Will this sustain?
This rally has been partly driven by liquidity and partly by push factors rather than pull factors, particularly on the fixed income side.Bond market fundamentals look more normal in countries like India and Indonesia than in the developed markets that have negative yields. This is pushing money into emerging market bond universe and that in turn is bringing investors back to emerging market equities. With investors having been underweight on emerging markets for such a long time, it is now appropriate that they come back to the asset class. If fundamentals and economic data continue to improve, they could become more overweight and we can certainly see more foreign inflows coming to emerging market equities.
US Fed officials have recently hinted that the case of rate hike has strengthened. When do you expect them to hike rates?
The Fed may not want to raise rates before the Presidential elections (in November). It means that a December interest rate hike is more likely than September. We are seeing signs of growth picking up in the US economy and unemployment is quite low. The Fed officials have been indicating that the markets are be coming complacent and it would be a mistake to assume that rates are going to stay this low all the way through 2017.
Do you think there is a bubble-like situation in the bond markets globally?
Investors are wary that bond yields have been compressed to record lows and so much of it is now negative. It is a very unhealthy situation and a sign of failure of policies in these countries and is pushing money into markets that have more normal-looking bond markets.There is a risk that if we do see a selloff in the developed market bond markets, treasuries and JGBs (Japanese government bonds), then some of the money that has come into emerging markets will flow out.
How do you view Indian equities after the sharp run-up recently?
India is still a very good long-term story. After the strong run up in emerging markets that we have seen, in the short term it wouldn’t be surprising if we have to give something back. We have seen quite a lot of foreign portfolio money coming back, but it hasn’t been excessive compared to the previous outflows. There is probably still some more to go. We want to see some pickup in earnings momentum, upgrades outnumbering downgrades and signs that earnings growth will pick up in FY17 and FY18.We would also like to see signs that private investment is finally picking up.
What do you make of the passage of the GST Bill?
The GST is a very sensible step. These kind of structural reforms don’t have any real visible or identifiable impact in the short term, but over a period of ten years, the impact should be quite significant and it should improve efficiency.
What signal does Urjit Patel’s appointment as the RBI governor send out to foreign investors?
It sends out a signal of continuity. He is being seen as a good choice (because) as part of the committee (on monetary policy framework).He was key in designing inflation-targeting policies and also, the new monetary arrangements in which the prerogative of cutting interest rates is no longer vested just in the governor but a monetary policy committee. I don’t think his appointment will affect rate cut expectations very much. CPI (consumer price index) inflation is above 6%, mostly due to food inflation, but we expect the present spike in food prices to be short-lived due to good monsoon. What would be taken badly by the markets is if he is subjected to pressure from the government to cut rates faster than the RBI would wish. That would be an unwise path but we have seen no hint of that either from Prime Minister Modi.
What should be done to help the ailing banking sector?
Some of the bad loans need to be carved out, maybe hived off to a separate bad asset bank.The best solution would be for the private sector to become much bigger in terms of its role in the banking sector in India, and the stateowned banks taking a smaller role.