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May 13, 2012, 08.59 PM IST
India is still a market that is fairly highly valued, says Masha Gordon of PIMCO. "The key here will be the delivery of earnings growth and the delivery on the policy agenda," she adds.
She further says, "In 2013, there is a high probability that China manages to find an equilibrium, political stalemate that comes from the Europe political transition is behind us and we see a turnaround in that dynamics. That will be positive increment for commodities. That clearly will be positive for the largest market in emerging markets (EMs) i.e. Chinese."
Below is the edited transcript of her interview with CNBC-TV18's Udayan Mukherjee. Also watch the accompanying videos.
Q: How are you feeling this year about emerging markets generally, cautious or bullish?
A: I think we have a number of things that are going in the right direction. Inflationary pressures are subsiding across EMs. That should be very helpful for policymakers, when they contemplate the level of rates. We have seen fairly accommodating central banks.
You have seen clearly a cut in your own country with RBI being fairly aggressive. So, there tends to be a tailwind to the growth momentum. Now, clearly the offside of that is a transitional challenge of growth in China and a growth challenge in other EM countries that come from decline in exports. So, I think that there are reasons to be cheerful, but there are reasons also to tamper an excessive optimism.
Q: Do you think we will muddle through this year with not too much by way of absolute performance or you think we can actually get some return out of equities? Last year it was very difficult to get anything out of equities at all.
A: Last year was a year of a big blowout; the European issue came to the forefront. This year clearly that issue remains in the background. But, we think that the story is far from over and that will serve as a reminder of the need to have pretty high risk on risk assets.
Now on EM equities and equities in general, you are seeing a number of healthy tailwinds that should help on the earnings front. The supporting last year for EM equities if you were to forget what the markets did, despite of a pretty lukewarm earnings growth, roughly 3 percentage points, you have had a very healthy growth in dividends.
EM Inc, so to speak gave 16% dividend growth that is given low leverage likely to continue in the coming years. So, we are clearly worried about the potential for earnings downgrades coming from the transition in China, but we are also hopeful that the dividend growth story continues to come through and that gives a nice support for EM equities.
Q: Are you looking at equities this year as quasi fixed income plus kind of investments with not the possibility of major upside in terms of real absolute returns?
A: There will be markets and there will be markets, right? There will be places where the growth trajectory takes off. We think that in Brazil, in particular, we probably would have seen the worse of the growth scare that has come on the back of pretty aggressive tightening. So, in that country we should see earnings troughing this year and starting to get the positive momentum upgrade.
So that’s the place where earnings are inexpensive and where you have a skillful potential for capital appreciation. In the market like China, it is a question mark how difficult the transition in the quality of growth is because you are changing in a very profound way. So, when you look on aggregate, it is difficult to say whether the earnings in some parts of the market would not simply collapse.
Q: How would you rate the BRICs right now in terms of your order of preference?
A: Russian market is exceptionally cheap. There are reasons why it is cheap, but there is probably less of the downside than there is for other markets that still trade in double digit multiple. The fears of policy inaction are in place. Again some of the blue chips are very, very cheap indeed and now are support by a fairly healthy yield.
Brazil is probably my number two preference. It should see a reacceleration in growth. There is a number of what we call falling angles growth stocks that have been disappointed, but the sound secular story is very much in place. So, I think that market should see a fairly strong second half.
India is still a market that is fairly highly valued. So, clearly the key here will be the delivery of earnings growth and the delivery on the policy agenda. Investors are exceptionally sceptical. There are a number of very interesting pieces written whether India reverts back to very low growth because of the failure to export, the failure to rein in public finances and the failure to mobilise our private investment for infrastructure. So, we need to see developments, whether it’s a funding story, whether it’s a story of responsible public finances or more than anything, the story on delivery on reforms to get that market moving.
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