The economic scenario in the emerging markets (EMs), especially India does not look good for the next 6-12 months, believes Arnab Das of Roubini Global Economics. Weak rupee and large outflows from the economy are affecting macro policy and macro performances, Das told CNBC-TV18. The market will see a strong headwind as a result, he adds.
On the improving conditions in the US economy and the possibility of tapering of quantitative easing, Das says, “The tide is turning a bit against EMs in favour of the US and also US relative to other developed countries.”
Monetary conditions in different countries will eventually tighten over a period of the next couple of years. Meanwhile, major central banks of Japan, UK and Europe are still in easing mode, he says. This divergence that the global economics are setting themselves up will be the key driver in the times to come, he adds.
Below is the edited transcript of his interview to CNBC-TV18.
Q: What is your sense of how to approach the global set up now? Most of these markets like the United States (US) are still sitting at record highs. But what would the way forward look like?
A: There is a lot of traction. There is a bit of holding period, holding pattern even though some important things have happened. The Japanese elections in the upper house took place and Shinzo Abe and his party has a decent size majority; although it is not a slam-dunk. We will have to see how that pans out for structural reform for Japan.
The message from the G20 meeting was that there should be more communication and more coordination as exit strategies takes place. These two things tell us really about what is going on in the world. The US is however, very gradually and maybe with better and more communication, is now heading for an exit.
So, monetary conditions will become progressively less easy and then eventually tighten over a period of the next couple of years. Meanwhile in other places around the world, the other major central banks are still in easing mode whether it is Japan, United Kingdom (UK), or the European Central Bank (ECB).
So, there is a divergence that is setting itself up gradually in different parts of the world. It will be the main driver, maybe not today or tomorrow. But the bigger picture that is what is going on.
Q: How are things panning out for the next 6 or even 12 months in terms of fund flows? The story of fund flows has been pretty bad for emerging markets (EM) especially markets like India over the past 8-12 weeks. That is ever since Bernanke raised the spectre of less liquidity in the days to come. Although his latest reiteration has caused less tremors, with every iteration it is causing less and less tremors still is the reality that the fund outflows will continue?
A: In the very short-term, we may get something of a reprieve during the next few months. But 6 to 12 months on that horizon, will be that much closer to and indeed perhaps even in the tapering phase.
Tapering is not exactly tightening, but it is a signal to the market of the new reality that things in US are improving. There had been a large flow of funds from the developed world, in particular United States into EMs in the last several years, it is now on the cusp of turning around.
It already started to turnaround in EM equities over the course of 2012-2013 and now in the last quarter, it has started to hit EM bonds and currencies. The tide is turning a bit against EMs in a bit in favour of the US and in favour of the US also relative to other developed countries. They are still in easing mode while the US is at least talking about tapering and then eventually stopping, easing and then eventually tightening.
Q: Your view on India itself? India is actually suffering a double whammy in the sense that funds are moving out and probably it is related to the second point that economic data, which was expected to have troughed out is actually getting worse and the signs of troughing are not there. Would you say that current equity index levels are peak valuation levels? Inspite of all this bad news, the index is not giving up. It is still staying in that same range and it is at the upper bound of its recent range. Is there a severe breakdown that you will see? Or since it has maintained so far inspite of all the bad news the index won’t breakdown?
A: I think the underlying fundamental economic story in India like in many other emerging markets is not that great. It is not as bad as some places, but it is not as good as it seemed previously. The growth rate is down significantly and despite that central banks in various EM countries including and especially India, are having to tighten the currency despite having previously wanted to weaken the currency.
So, they are getting too much of what they wished for because of that shift in fund flows. Those things are going to complicate the outlook for macro policy and macro performance in India and other EM countries. So, I don’t think that necessarily means that we have a crash in the equity market. However, it is going to be a strong headwind.
India and other countries are in that position. Large current account deficit countries, which are dependent on hot money portfolio capital inflows, are going to struggle in their equity indices and other risky asset classes to break free from these pressures. There will be periods of positive volatility, but the general trend is not going to be that great for the next 6-12 months.