Weak Re, Twin Deficits Manageable if India Sticks with Good Policies
India’s twin deficits and weakening rupee are the biggest weak links for the Indian markets, said Krishna Memani, chief investment officer at OppenheimerFunds, which has $248 billion in assets under management.If this situation continues for a reasonably long period of time it will have a material impact on Indian equity markets, said the New York-based fund manager in an interview with Sanam Mirchandani. Edited excerpts:
The currency market sell-off has rattled world markets. Was this expected? Some level of currency turmoil was definitely expected. The level that we are seeing certainly wasn’t what I was looking for. The talk of tariffs and punitive trade actions on part of the US is ending up being a far more material issue for market sentiment than the underlying developed (DM) market growth that we were looking for to spill over into the emerging markets (EM). The key question is what would it look like going forward and unless US growth slows down from here, sentiment is not likely to change dramatically. Our expectation is that US growth will slow down in 2019 but we need evidence of that before looking for a turnaround.
Do you expect the EM to DM trade to continue going forward? It will continue going forward at least for most of this year. At some time in the first half of next year we have to see some evidence of US economy slowing down. We believe we will see it but that remains to be seen I guess.
Would you say that the best phase of the bull market is over for emerging markets? For the bull market for emerging markets to be over you have to have substantial economic weakness. If you compare today relative to where things were in 2013 for example, or comparing to where things were in 1997-98, there is really no comparison. In the current environment for US monetary policy, it’s not looking very good for emerging markets for now but saying that the EM bull market run is over is a stretch.
Foreign investors are staying away from Indian equities despite better performance this year versus other markets. What are your thoughts? The challenge for India is not underlying growth and it’s not exports. Both of those are in reasonably good shape. The challenge for India is its twin deficits. The fact that oil prices are higher and the currency is weakening is a double whammy for the country. They are related but that makes the external situation from a flows standpoint far more precarious than it would be if the current account deficit was in much better shape. Having said that, let’s say even if the trend growth rate is 7% not 8% that we saw in the last quarter and a current account deficit significantly lower than that, it is reasonable. But that is reasonable in an environment where the global environment is supportive. It is not the case and therefore India is paying the price for that right now.
Current account deficit has returned to haunt the Indian economy and markets after a gap of five years. Do you see a similarity with the situation in 2013? No. The growth rate in the global economy despite having slowed down, is meaningfully higher than what it has been at any point in the cycle from 2008. Things are materi- ally better so it is not comparable to 2013 and that’s why we believe that any bit of stability or any bit of slowdown in the US will in turn stabilise the situation much faster than if it did in 2015-16.
Are Indian markets likely to maintain their outperformance versus other markets going ahead? Indian equity markets themselves are in reasonably good shape because underlying growth trend is quite decent and stable. From an economic fundamentals standpoint things are relatively stable. What’s not stable is foreign flows and that has an impact on the rupee. If this continues for a reasonably long period of time it will have a material impact on Indian equity markets as well. Even there Indian equity markets are benefiting from financialisation of domestic savings and on that front also situation is much better than it has been over the last 10-20 years in the Indian capital markets. The rupee and the twin deficits are the weak links. It is manageable as long as India sticks with good policies. Any weakening initiatives will actually have far deeper implication at this point than it would have had before. So the government has to be really careful and forward thinking policies that can stabilise the currency would be very beneficial.
What is your outlook for the rupee? The rupee situation is highly correlated with the dollar which is highly correlated with expectations of monetary policy in the US. If growth trend in the US remains the way it was in the second and early part of third quarter, then we have a problem in the making. Our expectation is that that growth will moderate as we get further into 2018 and it will definitely moderate as we get into 2019.
The pharma sector has been a great recovery story as you had previously said. Is it sustainable? We continue to believe that the pharma sector despite the recovering valuations remains quite attractive. The external environment certainly helps. The rupee certainly helps. It is a very attractive sector.