Bank Julius Baer says go for gold, bats big for India among EMs

Response to Brexit by central banks will be stimulatory and the emerging markets (EMs) will benefit from quantitative easing by banks, says Mark Matthews of Bank Julius Baer. Speaking to CNBC-TV18, Matthews says that he is overweight on EMs as an asset class. India continues to a bright spot. Seventh Pay Commission, GST expectations and monsoon will push growth for the country. On worries over exit of Raghuram Rajan and change in Jayant Sinha's portfolio, Matthew says: "India is a country of billion people and they will be able to find good replacements." Among currencies, dollar is expected to strengthen, he says. Other major currencies like euro and pound are still reeling under the Brexit impact. Matthews recommends gold in commodities. “It is worth having gold in the portfolio,” he says, adding that with central banks keeping rates low and little confidence over US elections, gold is a safe heaven.Below is the transcript of Mark Matthews’ interview to Anuj Singhal and Sonia Shenoy on CNBC-TV18.Anuj: The equity markets have moved on from Brexit. Do you think there is some bit of complacency which could come back to haunt market or do you think the markets are fine and they will move on?A: The markets are unstable, but I do think that Brexit will probably be in history an important inflection point not necessarily a negative one as far as the markets go. The reason I say that is because I think that the response to Brexit from governments and central banks around the world is going to stimulatory and that should offset the concerns about the economic impact of the Brexit, which is minimal. I think it is apparent now that it will probably be a soft or Brexit light, if you will, as opposed to a very acrimonious divorce.Sonia: What about the commodities space? All the action is apparently in gold nowadays. Are you a gold bull and would you advise investors to buy more now?A: Gold is a good thing to have in a portfolio because number one, the central banks unambiguously will be keeping rates low and in some cases going lower. Number two, because of the capital controls in China, gold is one of the only things that Chinese citizens can buy if they want to move their money away from renminbi.So, number three, I would just say is the heightened political risk this year, terrorist activity is the most obvious thing on television, but Brexit means we have much less confidence in the predictions about the US selection where everybody is saying Donald Trump is not going to win. But, everybody was saying that about Brexit, so who knows. And I do think Trump would be much more disruptive for markets than Brexit and so, putting all those things together, it is worth having gold.Anuj: What about the currency market? The pound is at historic lows of course, the rest of the currencies are relatively stable. What kind of move do you see in the currency market?A: It is going to be one of dollar strength and I was not saying that earlier this year but the dollar will probably be the default choice because pound, we have not seen real outflows yet from the UK but I suspect the pound has not put in a bottom yet.If you look back to 1992 when they exited the European exchange mechanism, it went down about 25 percent. The euro also, people are worried, if the British are in some form or another loosening their association with the European Union (EU), what does it mean for the other countries. There are referendums coming up in some of the others. We have got two coming up in Italy and Hungary, but the French probably will call for one next year and the Dutch as well. So, there is still a lot of uncertainty about the European economy and the euro. So, in terms of the major economies, that kind of leaves you with the dollar.Sonia: What about the Indian markets? You have been a long time bull of the Indian markets. Have you recently increased your allocation to India?A: We turned more positive on the emerging markets. So, you are right in saying that we had an overweight on India, but we were underweight the emerging markets and now we have upgraded the emerging markets as an asset class and there are many reasons for that. Probably an important one, more than any others, the one I told you earlier that the response to Brexit from central banks will be big and just like in 2009, when you had quantitative easing, that was better for emerging markets than the western world just because they are small. So, it just takes a little money to flow over into them to have a bigger impact.Anyway, specifically with India, we have had the civil servant pay hike. There is a good chance of the goods and services tax (GST) being passed in the monsoon session of the parliament. I just heard your commentator saying that the weather looks good, so if the crop is good that will be obviously good for the rural economy. Also, earnings are probably understated. If you look at economic data coming out of India, it has been good. So, there is a strong correlation between gross domestic product (GDP) growth and sales growth and therefore, hopefully earnings growth.And then I could throw in more things. I would just say that there is a good chance of a rate cut in August and we will get a new RBI governor announced in July. And then with State Bank of India (SBI) kicking off mergers finally in the public banks, all of those things are a lot of good things to talk about.Anuj: But from global investors’ point of view, first we had of course the Raghuram Rajan exit, now we have also Jayant Sinha moving out of the Finance Ministry. Has there been any worry on that front in terms of key people moving out of top positions as far as the finance is concerned?A: The way I would put it is that it is unfortunate and both people are highly qualified but India is a country of over a billion people. So, I am sure they will be able to find good replacements.