For the next 10 yrs, I would rather invest in India than in US
Aug 12, 2016 | Source: ET
Do you think probability of a rate hike by the US Federal Reserve has jumped after the latest jobs data? I don't think the Fed will move on rates this year. The employment figures are very questionable on whether there was much of an improvement because government jobs went up and seasonal adjustments took place. The economy is not particularly strong and the Fed is also concerned that $12 -trillion worth of sovereign bonds in Europe are having a negative yield. If they increase interest rates in the US, then the dollar will become too strong for the liking.
Do you maintain that a QE4 is on the way? The US terminated QE3 a while ago and that was replaced by monetary easing methods like asset purchases in Japan and in the EU (European Union). The BoE (Bank of England), Fed, ECB (European Central Bank) and the BoJ (Bank of Japan) are still buying a monthly $180- billion worth of bonds. There is large monetization, larger than when QE1 started in the US. Not much will happen before the election in terms of moving up rates or initiating new programmes in the US. But next year, it is quite likely that we will have further monetary easing or the so called helicopter money.
You recently said you are negative on the global economy. How are EMs placed in this scenario? One reason I am negative about the world is that much of the growth in recent years was driven by rapid expansion in China. The Chinese growth will slow down. Indian economy can easily grow, maybe not at 7 per cent per annum, but at 4--6 per cent per annum. Some people say it is very pessimistic. But if you compare 4 per cent growth to 0 per cent growth in Europe and 1 per cent growth in the US, it is actually a very good economic performance. Since early 2016 many emerging markets have grossly outperformed the US. The valuations in emerging economies are much more attractive than in the US. If you take a horizon of 10 years, you will make more money in emerging economies than in the US. The same would apply to India. The problem in emerging economies including India is that quality companies are very expensive. But in India and other emerging economies there are also lots of companies that have a reasonable valuation. Provided the world doesn't collapse and holds together, emerging economies will do okay.
What is your outlook for Indian markets? In Indian markets, we have to look at individual companies. Some companies in India are fully priced and others are attractive. In general, the introduction of the GST is a positive for the prestige of Modi. How it will be implemented is still a question mark. It is positive for people in a way but whether it also means higher taxes will depend on the technicalities of how it is imposed.
With valuations being high due to rally since March, are Indian stocks out of buying range again? When it was around 20,000, I had mentioned that Indian stocks have moved into a buying range. Now around 28,000, it may still go higher but it also depends on the Reserve Bank of India. Whoever is elected as the next governor would be more inclined to print money and to cut interest rates than Rajan. And so the currency could weaken again, say by year end to 70--75 (against the dollar), which would then imply that stocks would be cheaper by the currency depreciation and so, in local currency the stock market might go up, not necessarily in dollar terms. But for the next 10 years, I would probably rather invest in India than in the US.
What is the scope for rate cuts here? That would depend on the new governor. In principle, I have advocated that high interest rates are good for India because it implies that the currency is stable, which benefits most Indians. A weak currency benefits shareholders, property owners because share values go up. But this is a minority. There are more than 1.2 billion Indians. Probably not even 5 million own shares. The impact of rising share market on the economic activity is very limited. If the new governor is a money printer like Yellen and Bernanke, then the currency will go down a lot.
What are the sectors that you like In India? Banks are not unattractive but consumer stocks are relatively expensive.
Do you remain bullish on gold as an asset class? The central banks will continue to print money. When I compare the price of gold in the late 1990s, it was below $300 an ounce. Now it is above $1,300 an ounce. But when I compare the expansion of central banks' balance sheets, the global economy, the quantity of money and credit in the world, then I can make a case that actually gold today is cheaper than in the 1990s when I compare it with all the other monetary aggregates. I think people should still own gold.