Speaking to CNBC-TV18, Bill Maldonado, Chief Investment Officer-Asia Pacific and Global CIO-Equities at HSBC Global Asset Management, said the Modi government has a fantastic track record on reforms.
The end of austerity-driven policies pursued by governments, not the advent of Donald Trump, has been the biggest recent development for the global economy, said Bill Maldonado, Chief Investment Officer-Asia Pacific and Global CIO-Equities at HSBC Global Asset Management.
Speaking to CNBC-TV18, Maldonado said that fiscal policy was now taking the driver’s seat as government worldwide sought to strengthen their economies. He said austerity had proved to be a major “fiscal drag” and that while it had not had a major impact on the stock markets, austerity had affected both growth and earnings.
Maldonado said he didn’t think world equities have been overvalued and that the US is "doing fine". He admitted that uncertainty is currently high after Donald Trump had taken over as US president, but the hope was that his protectionist rhetoric would not translate into policy. On the whole, Maldonado said, the outlook remained positive, particularly in emerging markets and that investors need to see the growth in earnings.
Maldonado said that in India, the Modi government’s “fantastic track record” on reforms had made it a relatively attractive market, but added North Asian markets look most attractive as concerns about China had reduced.
Below is the verbatim transcript of Bill Maldonado's interview to Prashant Nair on CNBC-TV18.
Q: What is your view on the world economy considering there is a fair bit of uncertainty surrounding the policies of the Trump administration?
A: Certainly investors around the world are very concerned about uncertainty. When you look back, imagine that you teleported back to 2005. Look at all the horrendous things that have happened since 2005 from nuclear missiles in Korea, the global financial crisis, ISIS rising, terrorist attacks all over the world, it has been a horrible twelve years and yet the US equity market is doubled over that time. So in general, investors get far too focused on events and negativity and don’t focus enough on fundamentals and I would say right now, the fundamentals are very interesting and I would even say very positive, something quite large, quite big has happened this year and I don’t mean Trump and I don’t mean Brexit and I don’t mean all those things that are related but they are not the main event.
The main event is that we have got an end of austerity situation, it is too early to call it reflation but we have certainly got an end to the very austere kind of policy that has been pursued by most governments around the world. That has been a big fiscal drag on the economy which has had to be made up by monetary policy. That has been doing the heavy lifting around the world.
This year for the first time in a long time, we have the prospect of fiscal policy coming into play on top of an already strengthening economy. So that is a very positive outlook for investors, very positive outlook for equities and risk assets around the world.
Of course, there are risks attached. We have the rhetoric that comes with that around protectionism and deglobalisation. We hope and we believe that it is more rhetoric than real intent. But we have to wait and see. For now the judgement is that the positives will very much outweigh the negatives and that this stronger economy will be good news for investors particularly in emerging markets, which are very exposed geared to the global economy, lesser than a decade ago maybe because we now have a consumer class that has emerged in most developing economies but still very much more exposed to the world economy than other markets.
Q: So end of austerity is how you are calling it and we can see the traces of it around the world in big economies and smaller economies as well, very briefly austerity did not mean that the stock markets around the world did poorly. US market has done very well, people have been trying to call the top of it for a while unsuccessfully, so when austerity is behind and the fiscal policy takes the driver’s seat, what does it mean?
A: Austerity has not necessarily held back markets completely but it has certainly been a drag on growth and as far as growth feeds in to earnings and earnings drive stock markets, it has been a drag on stock markets as well. So despite good performance, we perhaps could have had even better performance, even better growth. So we don’t think that equities are overvalued, at best the US is neutral or worst depending on your perspective and other markets are significantly cheaper so we might prefer the world ex-US but the US still looks okay. So I think there is a lot of upside in these markets especially if investors begin to see the growth coming through in earnings. That is the key for the next year or two years and if that happens, we could have quite strong markets.
Q: You don’t believe that the US is turning inwards, there is a fair bit of commentary going all around, that is what is happening, border taxation and things like that, you don’t think that will be a reality or you believe that even if that were to happen, it will not impact globalisation so to speak to that degree?
A: If it happens in a very strict way or in a very aggressive way, of course that could be very harmful to the world economy and therefore to asset prices. It is at the moment, not our central expectation but that will be enacted in that way for the simple reason that the administration in the US and anywhere else that wants to be very protectionist and anti-globalisation will hurt its own support base very badly if it executes too aggressively.
If you think about Trump support base, it comes from the middle class or lower middle class, blue collared workers, they will shop at Walmart at places, which are very dependent on imports to be able to provide good, very low prices and a wide choices of goods to consumers. If we start seeing those prices rising as a result of trade barriers, tariffs etc then that would hurt those consumers, that would hurt the support base of these populist governments.
So there is a brake, there is a cap on how aggressive they can get. That is the view at the moment. We don’t know that, nobody knows that for sure, how that is going to playout but at least we can observe that there is a cap to how much they can do and so our judgement is based on that analysis and saying therefore the upside is a lot more than the downside from what we can see at the moment but we have to continue to monitor that risk.
Q: You said you prefer world stock markets ex US, you are okay with US as well but if you had to sort of stack it up you would prefer markets outside the US. Which are your top bets right now and does India figure on the top five say?
A: We would start at a regional level and we would say Europe looks more attractive than the US amongst developed markets, Japan hedged looks very attractive amongst developed markets, and then emerging markets look very good versus developed particularly Asia. So, those would be our preferences.
Within Asia and we would include of course India in our Asia definition, we would say North Asian markets, China, Korea, Taiwan, Hong Kong look the most attractive simply because investors were trying very hard to get away from those markets when they were very worried about China. They are much less concerned about China now and so what they did was push down prices and valuations there and they pushed up valuations in the ASEAN countries.
India is very interesting. India is somewhere between those two and India hardly ever gets cheap relative to the rest of region. India is usually an expensive market and right now it is a neutral market. So, within India, we can find interesting opportunities and India looks relatively attractive compared to its own history. So, we like India and we have exposure to the Indian market in the global portfolio.
Q: We have the Union Budget which is always a big event here, what is your sense, what should be done by the government, by policymakers to attract more capital, both finance capital and foreign direct investment (FDI)?
A: I think the government has so far got, I would describe as a fantastic track record. If I think about the reformist agenda, that is one of the big attractions in emerging markets. There are a lot of gains to be made from reform and if I am interested in buying markets where we see a lot reforms, India is right up there. It is probably the most reform driven market of the last three years. So to start, we have to give the government a lot of credit for what it has already achieved.
In terms of specifics for the Budget, I don’t really know, I don’t know what to expect. These things are usually very unpredictable. I would say that one benefit that the Indian economy has right now is the perception that international investors have which is that not only is the government reform minded and is prepared to tackle really quite challenging issues, but it is also running a very fiscally prudent and monetarily prudent economy.
So, we have got a well-run Reserve Bank of India (RBI), people were perhaps a bit concerned in the transition from the previous governor, but that seems to have gone extremely well and the new governor has established his credentials. I think from an international perspective, what investors would be saying is please don\\'t do anything to damage the credibility and the goodwill that you have built up internationally over the last three years. We don’t think they will, we think they will continue to be very prudent, very disciplined and continue to build on that goodwill.
Q: You are saying that you hope, expect, and you think the government will stick to its fiscal deficit targets, they won’t loosen it, they won’t engage in deficit spending, that is essentially what you are saying. On taxation, there is a lot of talk now this time that taxes and stocks, the threshold to avail of those exemptions might be made tougher. Right now if you hold stocks for over a year, you don’t have to pay the 15 percent tax - that might be made three years. The rate of taxation might itself be bumped up from 15 percent to 20 percent, how might investors view that if were to happen?
A: I don’t think that would be a huge negative. That would align equities with other asset classes and I don’t think that would be a big negative. That is actually a benefit that India has that it rewards long term investors, long term holders of equities. So, I would not personally see that as a big negative. I would not necessarily try to predict that either. I would not forecast it but if it occurred, I would not see it as a big negative.
Jumping back for a second on your fiscal question, just to add a little bit of colour to that, what we would say is the government here has done a great job of using the fall in oil prices very wisely. In other places, in other countries, what we have seen is the dividend if you like from lower oil prices get squandered. Here it has not been squandered. It has been used wisely. We have seen the government’s fiscal picture improve, we seen it repair its balance sheet as it were and we have seen it reduce subsidiaries and do other things that in our view are very smart, very prudent, very wise. So, it has left itself in a position which is very solid.
So, if you say to an international investor what do you think are the challenges that the government has in meeting its fiscal targets, I think most international investors would say the government should relatively easily be able to meet the fiscal targets that is set out. Of course there can be variation plus or minus wherein nobody is trying to hold the government down to three decimal places on a Budget target, but they have built themselves some room to maneuver, they should be able to hit those targets relatively comfortably.
Q: Corporate tax rates being brought down, Trump is talking about on the US, big change there -- lower, does it need to get down here and how urgently?
A: That is always good news for investors. Investors are going to like that very much if you see a move in that direction. I think the challenge for India is slightly different. It is a very different stage of development to the US economy. So, that may not necessarily be a government priority and perhaps it shouldn’t be a government priority although investors would like it.
Much more important I would say is for the government to widen the tax net, to bring into more formal employment, a much wider set of the population, at the moment it is a very narrow range of the population that is informal employment and paying taxes. So broadening that perhaps is a higher priority for the government than corporate taxes. However, I don’t know, I think investors will welcome that kind of move also.