Weak Re, Twin Deficits Man­age­able if In­dia Sticks with Good Poli­cies

The Economic Times - - Money - “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 CAD was in much bet­ter shape”

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.

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