‘2nd wave likely to hurt near-term earnings in India’

Inflationary pressures are starting to emerge and any sharp interest rate movement can derail global equities, says ALEX TEDDER, chief investment officer, head of global and thematic equities, Schroders Investment Management. In an interview, he tells Ashley Coutinho that the near-term outlook for emerging markets (EMS) is clearly driven by Covid-19. Edited excerpts:

What is your outlook for US equities in 2021?

Despite optically stretched valuations, we believe there are a number of factors that can drive the US and global markets higher over the next 12 months. As lockdowns are eased in key economies, confidence is returning and the momentum for recovery is building. Given the inventory run-down in many industries during Covid, we expect a very powerful inventory rebuild cycle across most industries.

The Biden administration has announced three major stimulus programmes that are already providing significant support to the economy. The $1.9-trillion American Rescue Plan, which put cheques directly in the hands of households during the lockdown. The $2.3-trillion American Jobs plan and the $1.9 trillion American Family plan. Not all the measures proposed by US President Joe Biden will be approved. But in all likelihood major components of each package will make it through both Houses.

What is your view on India vis à vis other EMS in the aftermath of the second wave?

The Indian equity markets have been laggards this year vis à vis global markets due to the severity of the second wave. While the country has been hit hard by the second wave, we believe the markets are willing to look past that. We expect some impact in near-term earnings in the region. But the base case expectation remains the economy was recovering strongly before the second wave, and once this wave peaks we expect growth to return.

What are your views on EMS? The near-term outlook for EMS is clearly driven by Covid-19. The human cost aside, the virus will limit the full economic potential of these markets for some time. Vaccine supply and distribution continues to lag developed markets, which may hinder nearterm economic recovery in certain countries. New variants have shown that the virus is not easily eradicated and is still best controlled through restrictions on social mobility. This has implications for consumption and the domestic economy. In theory, EMS perform well during periods of cyclical recovery and economic expansion and should benefit from the global recovery after the pandemic.

Will inflationary pressures have a bearing on global equities?

Inflationary pressures are already starting to emerge, most notably through the sharp rise in commodity prices in the past 6-9 months, feeding into high intermediate inflation. Although the Consumer Price Index remains subdued in most developed economies, we believe this is a lagging indicator since it includes many items such as rent, which are slow to recover.