Katalin Gingold, Head of Equity Research, Cartica Capital, is of the view that volatility in global markets will continue because it is impossible to ignore US politics and Donald Trump's rhetoric.However, she says if one were to evaluate fundamentals of emerging markets (EMs), they are still very positive and the growth gap between the developed and emerging space is expanding. "This signals an outperformance for EMs," she said.Major US stock indexes posted their largest drop so far in 2017 on Monday as investors worried that a curb on immigration ordered by Donald Trump was a reminder that some of the US president's policies are not market-friendly.According to her, the balance sheets of EMs are strong and the markets earlier too have survived global shocks like taper tantrums etc. Moreover, the currencies in these markets are competitive, inflation is under control. So, the valuation argument for EMs to is in favour as compared to the developed markets (DMs).Talking about her expectations from the Union Budget 2017 in India, She hopes that the government would resist making it a populous Budget and continues its path of fiscal consolidation and is committed to keeping inflation under control especially with US interest rates on the rise now.Being long-term investors in India, they would look out for clarity on taxation, says Gingold.Below is the verbatim transcript of Katalin Gingold's interview to Latha Venkatesh, Sonia Shenoy & Anuj Singhal. Latha: Is this just a one-off correction that we are seeing in the US markets. Would you say that global growth and therefore global risk appetite for equities is still solid?
A: This is a difficult question to answer because there is just so much volatility and it is impossible to ignore US politics and the constantly tweeting President, so it is difficult to step back and look at the fundamentals but if I do that for a second and look at global markets and specifically emerging markets, there were Cartica invest. The fundamentals are actually quite positive. First, as you suggested the economic activity is improving globally and not only in the US and it's the same in Europe, Japan and also in emerging markets and more importantly the growth gap between emerging markets and developed markets are expanding again, the first time since 2011 and this usually signals an outperformance of emerging markets against the developed world.
Second, looking at the EMs balance sheets, they are quite solid and they are in much better shape than they were in 2013 during the taper tantrum. The markets have been through a lot, they survived the huge dollar rally, total collapse in commodity prices and in most part, I would say, they have adjusted to this new reality. The emerging market currencies are competitive, inflation is under control. There is an attractive carry that eventually should attract money back into emerging markets and very importantly the valuation argument is still for emerging markets against developed markets and not only we have cheap valuations, we also have earnings finally turning around as the economic activity picks up that brings up revenue growth and then margins will hopefully start to turn around after compressing for the most part of the last couple of years.
Anuj: The worry is that the market was factoring in that the election rhetoric would be different from governance. Now we are finding out that the bite is as bad as the bark. In that case could there be a bit of a derating?
A: I agree with you and short-term the volatility is here to stay and the US market is clearly pricing in nearly perfect scenario and the first ten days of President Trump wasn't exactly encouraging because we heard more about policies that could limit growth as suppose to policies that could support growth. So most likely we will see much more volatility, US equities are priced for perfection - that gives me some confidence that emerging markets can still perform because they are much cheaper. I do not expect an immediate collapse in confidence as we discussed the economic momentum is positive and at the end there is a limit to how much President Trump can do to affect the growth trajectory over the short to medium-term.
Sonia: You track the Indian markets closely and tomorrow is our Union Budget. What would your key expectations be and how worried would you be about the possibility of further taxation?
A: Taxation is an important issue. I would say that first of all we heard in some corner that some people expecting a populist Budget to ease the pain of demonetisation and ahead of the key state elections. We hope here that the government will continue its fiscal consolidation path which is very important from longer term perspective and especially in terms of keeping inflation under control in a year where US interest rates are rising.
In terms of taxation we are positive about government's commitment to simplify the taxation system in India and reduce corporate and personal income taxes. I do not think that will have much of a short-term impact or even medium-term impact given the fiscal constrains and the extent they could actually reduce rates in this current environment but it is definitely very encouraging longer term path.
On the specific taxation of capital gains which you may refer, there would be great to have some more clarity. As equity investors we are waiting to hear whether the time holding period will be expanded or not on longer term capital gains. We at Cartica, we are longer term investors but if it gets expanded from 12 months to three years, which was the case for fixed income that would make an impact on our performance but that being said we are still very committed to India on the long-term. We think that is a market that will have very positive performance and we are committed to our holding, a very substantial holdings of Indian equities in our global emerging market portfolio.
Latha: One combination that is expected and there is no guarantee that this is what will come is that a long-term gets defined as 24 months and above unlike 12 months and above now and the palliative for this is that corporate taxes are reduced by 1 percent because there is a long standing promise that corporate taxes will be brought down from the high of 30 percent to 25 percent over a five year period - that might well start this Budget. If the combination came like that, would you still take that as negative?
A: I would say and I would emphasize that it is only short-term negative. Our portfolio is very concentrated and we only own a couple of stocks in India, so I would have to do the math of what would it come about in terms of our near-term impact given that the effective tax rate is actually lower than the statutory tax rate for most Indian companies and most of our portfolio companies net-net it would be a short-term negative but this has not changed our positioning or our views on India. We do not change our portfolio tactically based on short-term transitory impact and at the end we will be happy with more clarity and knowing the rules going forward.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
