See fisc cliff deal soon; positive on India: Aberdeen Asset

The US fiscal cliff has remained a cause of concern and markets all over the world are eyeing some momentum stemming out of a resolution to this all important issue. Peter Elston of Aberdeen Asset Management Asia believes a deal will be struck with regards to the fiscal cliff. However, the scale of fiscal contraction post the deal might worry the US private sector and the consumers, he opined.

Also read: Asian shares up on hopes of US fiscal cliff deal
Therefore, Elston feels a resolution to the fiscal cliff might bring some positive news for the markets but, the US economy is likely to remain challenged going ahead. The fiscal contraction might also lead to further deleveraging in the US, he added. 
Elston is also hopeful about the emerging markets, particularly about India. "I think one should always have a strategic overweight towards emerging markets because that’s where the growth is. So more often than not, one should be overweight on emerging markets," he clarified.
According to Elston, India has a strong potential for growth and the competition in India has grown stronger in the last 18 months. "We have a very heavy position in our Asian portfolios in India. A part of that is good corporate governance at those companies, part of that is the growth potential in India is extremely strong. I think looking at where we are now, there is some encouraging signs on the macro front. We also have to remember that India is a lot more competitive than it was 18 months ago following the depreciation in the rupee," he opined
 
Here is the edited transcript of the interview on CNBC-TV18. Q: The way developments have panned out in the last 48 hours, does it look likely to you that they are about to cobble up a fiscal cliff deal which can see some injection of momentum in global markets?
A: I suppose with respect to whether or not a deal gets done, we are pretty sure that some sort of a deal will get done. But, the point to make is that any deal that gets done is still going to involve some sort of fiscal contraction next year.
It won't be quite as big as we might have been worrying about one or two months ago, but it is still going to be a contraction and the question is, is the US private sector, is the US consumer strong enough to be able to withstand a fiscal contraction and I think the point to make is that the US consumer is still very leveraged, still has too much debt and it is possible that this could lead to another round of deleveraging.
We are positive about the deal but, we are quite nervous about the impact that the fiscal contraction can have. I think this will not be realized for some time so perhaps in the near term there is scope for markets to rise but, looking further out it will become apparent that the US economy remains very challenged. Q: I was going through the Merrill Lynch's fund managers survey, which shows that most fund managers have now taken exposure in emerging markets and that number has doubled since September. Would you say emerging markets are the preferred vehicle in equities going into the next year?
A: I think one should always have a strategic overweight towards emerging markets because that’s where the growth is. So more often than not, one should be overweight on emerging markets. The times to be underweight are probably those times where emerging markets are overheating and as a result of that having to tighten monetary policy. That is in fact what we have had since 2010 following the very big fiscal stimulus that we had across the emerging world that resulted in overheating and many emerging markets had to then tighten.
We saw emerging market equities underperform their developed counterparts. I think we are now through that period, inflationary pressures have eased and we have started to see a number of central banks across the emerging world start to loosen monetary policy and we started to see emerging markets outperform and I suspect that can probably last for some time. Q: What are your thoughts on India going into 2013? It has done very well this year, put in almost 30 percent gain in dollar terms. Are you expecting an encore next year?
A: I think you know very well that we have always liked India. We always had a lot of success in finding companies that we feel comfortable holding on a long-term basis. So we have a very heavy position in our Asian portfolios in India.
A part of that is good corporate governance at those companies, part of that is the growth potential in India is extremely strong. I think looking at where we are now, there is some encouraging signs on the macro front. We also have to remember that India is a lot more competitive than it was 18 months ago following the depreciation in the rupee from what it was, around 45 to 55 or so against the US dollar.
That is a huge boost for many Indian companies and provides a very strong base from which the corporate sector can continue to grow and not combined with some better signals on the macro front. I think it's pretty positive. Q: Have you made any tactical changes though to your exposure in India considering the fact that different sectors, especially the high beta faces have started moving now?
A: We haven’t made any changes to our Indian model portfolio within our Asian funds for the last three months. For our Asia Pacific ex-Japan funds, our India target is 12 percent. I think that compares with the waiting in the Morgan Stanley Capital International (MSCI) Asia Pacific ex-Japan index of around 6 to 7 percent. So we haven’t made any changes recently and that just reflects a pretty positive view on India over medium and long-term.