While 2016 has had the worst start to the year, global fundamentals still remain positive, says Dominic Barton, Global MD of McKinsey & Co. Investors are getting distracted by market indicators, whereas the focus needs to be on fundamentals, he adds.
Speaking on China, Barton says that while the country is facing lower growth, it is not crashing. China is undergoing structural change – from an export-based economy to consumer-service economy, he says adding that it will be a higher quality growth.
Barton is bullish on India and says that there is much more potential in the country. The Modi government is working to change the mindset towards investments, he says.
The challenge now is implementation of policies and reforms, he says adding that countries must focus on unlocking values by boosting infrastructure spend.
There is need for more long-term investors than short-term, he says adding that one needs to move away from ‘quarterly capitalism.’ Barton is also bullish on US, Indonesia and Brazil.
Below is the verbatim transcript of Dominic Barton's interview with Ronojoy Banerjee on CNBC-TV18.
Q: I am curious to know what sense you make of the global economy because 2016 has started on a very turbulent note, markets are choppy, oil is trading at USD 30 per barrel and overall there is a lot of pessimism and gloom, what is your reading of the economy?
A: Definitely the markets never had a worst start in history. There is a lot of worry that is out there with oil prices drifting lower and so far. I am quite positive.
I think that the fundamentals are still quite strong. I think China is not crashing, its lower growth than it has been in the past and it is still strong. We have got India which is doing very well, the US economy continues to power ahead.
So I think that we are getting too distracted with indicators and there are not to be ignored but I think we shouldn’t be distracted by that. We have got urbanisation happening in India, we have got a huge middle class that is going to be built, we have got technological innovation and revolution so I am much more bullish.
Q: Stock markets cannot be seen as a barometer for the economic fundamentals?
A: I don’t think so overtime you have to look at it but it is certainly not the Chinese stock market, that is more of a casino. It is a very small part of how the economy works. That is retail investors and I think there is a lot of hedge funds and short-term players that are looking at these indicators and moving in and out.
If you look at more the long-term investors, the pension funds, they are investing in India, they are investing in fundamentals and that continues so I think we cannot get too distorted by short-term market.
Q: What is your reading of China? You said that you are still largely optimistic but the concern is that when it comes to data, people question the veracity of data so what is your conversation like with investors there and how bigger problem will China be in the long run?
A: I think there are a couple of things going on in China. We just have to recognize. One is that they are going through a massive structural transition. They are going from an investment driven, export oriented economy where you could control things.
You could build bridges, there is a more leverage that is clear for technocrats to push to a much more consumer service based economy and you cannot tell consumers what to buy, how they are going to consume? That is the shift that is going on and it is much larger.
USD 11 trillion economy, there is no way keep growing at 8 percent like you were when you were a USD 2 trillion economy. So there is this fundamental transition that is going on which is going to create something and it is a much less controlled growth. I think it is a higher quality growth around the consumer. But the fundamentals are there, if you look at it -- China is only 54 percent urbanised.
There are still 20 million people a year going from rural areas to cities, there are still going to need to be infrastructural investment. So that shift will continue. What you need to look at though is China is bifurcated. If you are in basic manufacturing steel, there is a need for consolidation. If you are in the consumer, digital, in the private sector, financial services, it is just booming.
Q: So we cannot look at the Chinese economy as a monolithic entity?
A: No, but the net-net I believe it is still moving, it is still an engine that is there but I think it is much harder for a group of technocrats who used to being able to have more if you will control to do that when it is that much larger and it is that much more consumer based.
So the government's ability in China to control the economy is getting more difficult.
Q: Christine Lagarde has said sometime back that the world needs to get used to lower growth. In fact she called it a new mediocre, so is it the same with both China and the developed markets?
A: No, I still think there is a lot of potential in China. India is doing superbly well over 7.5-7.7 percent growth. Indonesia will continue to move and I am bullish on some of the African economies. We have to look at the potential.
There is very significant potential in Brazil, but I have been negative on Brazil because of weak governance. So governance -- something that Prime Minister talked about -- is fundamental to how you can unlock the potential.
So, I don’t think we should accept lower growth. We have to demand more of our political leaders and governance to unleash that growth not because it is not there, it is because we are inhibiting it.
Q: Fundamentally you don’t believe then that the world is moving towards a no growth regime in that sense?
A: I do think that there is some shifts that will suggest that it is going to be lower than it was in last 50 years because we have much lesser demographic dividends for example except for places like India but we have fundamentally older population, older people consume less, they are not going to be part of labour force. That said, there is a lot more new countries and new markets that is coming out of the system, so I think it is not a big debate in my view. There is a huge amount of potential for companies, for organizations to look at.
The challenge I think we have to unlock is what the lack of infrastructure is blocking the chance for growth. We are seeing that in a regulatory -- the ease of doing business, there are a lot of things like that if we can get better governance, I think we would see a higher level of growth.
By the way, it is the same in the US. We should see even higher growth, we have governance issues there, it is not just an emerging market, it is everywhere. So I think we should be more demanding of our government and looking at the potential up there, what is blocking it and what do we need to do to debottleneck it.
(Copy edited by Rishma Kapur, interview transcribed by Sonal Jadhav)