Global market to see better growth in 2017 than 2016: Jim Walker

Global market will witness better growth in 2017 than it did last year, said Jim Walker, MD and founder of Asianomics. Another important aspect that will help pick up growth will be a revival in exports that was led by a weak dollar."Dollar denominated exports improved in the second half Of 2016. This may continue in 2017," says Walker.But he is worried about the rising consumer prices and how they may affect the market. As consumer prices pick up, the policy makers, he said, will be forced to tighten policy while economic growth rises.He says he no longer remains short on commodities. There is not going to be a downside to commodity to prices going ahead. However, he also sees no major gains to commodity prices.Below is the verbatim transcript of Jim Walker's interview to Latha Venkatesh on CNBC-TV18.Q: You come, perhaps, at a time when the world economy is more joyous than it has been in the past several years. Would you think that 2017 is going to see the global economy slightly better off, growing better than it has in the past three or four years?A: It is possible it will grow a bit better as long as certain people don't upset the applecart too much. There has been a lot of money around for many years and some of it is eventually going to seep into economic activity. And I think we have seen a bit of that over the course of the last 12 months. However, actually much more important for a bit of a revival in export growth has been a relatively weak dollar. At the beginning of 2016 the dollar was very strong and then it weakened off right through the early part of the year and that helped the dollar purchasing power in other parts of the world which had increased demand for dollar denominated exports which is most of global trade and that really was the thing that revived dollar fortunes. That along with the fact that China was doing a lot better than it had been in 2015. All of these things continue into 2017. It kind of depends on some of the personalities around just now.Q: What is your sense? Will US show faster economic growth or will this euphoria die down?A: As you see, there is a lot of euphoria, there is a lot of consumer confidence in a lot of the - the confidence indices have picked up. I have got to say that that makes me slightly concerned because the confidence indices and the signals on the business side are not always forward through into economic activity and I think we really need to see whether that is going to happen. Here is my worry, just now, for the markets more than potentially the economy is that consumer prices have begun to pick up. In our view, there has been plenty of inflation for the last eight years. It has just been in money supply and it is going into asset places. Central banks and policy makers are much more focused on consumer prices, I am not quite sure why, but that means that must have an awful lot of problems in the economy, but they are. And what that means is that as consumer prices begin to pick up, they will forced to tighten policy, even if economic growth is also accelerating. And here is the bad news for equity markets and particularly, the US equity market in my view. Money supply growth will actually slow down. Consumer prices will pick up. Let us assume that economic growth picks up a little bit and that means that there is much less money available to push asset prices higher. So, what you could easily end up with, this year is that economic growth is okay, consumer prices pick up a bit, central banks tighten and stock markets come off 20 percent.Q: There are two things on which the emerging markets worry and perhaps even global markets. What we have seen actually, is a strengthening dollar, it almost went up to 103, the Dollar Index (DXY) and we saw US yield also go to 2.5 percent. What is your sense about how those two factors might play out in 2017 and what might that mean to markets?A: That is what would worry me that if we got a strengthening dollar, 103 or staying there. Of course, it has actually come off a bit since then, but let us say it went back to that or went to 105 and interest rates went up slightly, even just slightly from here. What that does is that it squeezes purchasing power in dollar terms in places like Europe, Japan and the emerging markets and that tends to be very bad news for export growth.So, if that were to happen and then, even though it is supposedly signalling a stronger US economy, what it would to do is weaken the purchasing power of everybody else and that would be a drag on exports for Asian countries, including India. That would not be very good news in terms of the attitude towards emerging markets. So, what we really need to see is the dollar weakening from here. And to be quite honest, given the activity levels in the US, rather than the confidence indices, there is plenty of support for a weaker dollar and I think that is what we will see during the course of this year as the interest rate rises that everybody is expecting, actually do not come through. Q: One spot of good news for emerging markets has been the rising commodity prices, not crude so much as metals. Do you think that trade can continue through 2017? We were pretty surprised by the metal trade in 2016.A: At the beginning of 2016, we took off our short on commodities. It had been a very good short during the course of 2015, but what we thought at the beginning of 2016 was that it had run its course and there really was not much downside to the commodity prices. That was partly because there was already a supply response going on especially in the metals side and also a bit of a demand revival, not a strong one at that point in China, but at least a stabilisation and that has continued.There has been at least some pickup in economic activity in China along with reasonable economic activity in other emerging markets which has been the case in the last seven years. So, the stabilisation in commodity prices came as no surprise to us. The fact that it went up so much last year was a wee bit of a surprise. I would not be chasing that commodity trade now. I do not think there is much downside for commodity prices, but I think there is very limited upside now. So, I am happy that they have revived and that is good news for emerging markets generally, but I do not think there is going to much more in the way of upside surprises from commodity prices this year.Q: One more global factor. China gave us a lot of nasty surprises in 2015 and even in early 2016, we were all worrying about yuan devaluation. But actually in 2016, China was a benign factor. What will China mean to the global economy in 2017: more growth, more commodity purchases or some instability which we are not able to put our finger on now? A: No, I do not think we are going to get very much in the way of instability in China this year. There will be a continuous stimulus push. China has been very interesting in the course of the last 12 months and has replaced foreign reserves as the driver of money supply in the Chinese economy with domestic corporations increasing the money supply. So, the central bank has shifted the emphasis. Effectively, they have done something of a quantitative easing (QE) within China. That is specifically going to continue this year because this year is an election year in China, every bit as much as it is an election year in France and Germany. Xi Jinping, the President of China fully intends to have the support of the National People's Congress when they meet in October to get another five year term. So, it is pretty well steady as we go in China this year, maybe a little bit more stimulus, not dramatic and the economy is going to be doing just fine.Q: What should emerging markets expect in terms of fund flows in 2017?A: Global money flows are going to be coming to India for the next 10 years or maybe even 20 years to take advantage of the demographic dividend that the country is producing. But it is also true of places like Indonesia, Philippines, Vietnam and parts of Africa that I don’t know anywhere near as well as I know Asia. The story of emerging markets particularly in these areas of potential high demand domestically and young people to shoulder the burden, that is a story that is not going away. I really do think that people are beginning to realise in the industrialised world that the growth isn’t there, even if it picks up this year it will be insipid. It will go back down again because interest rate burdens are far too high. That has happened at a time when pensions are a real weight on the system and government spending is a weight on the system. Economic growth is now stuck at much lower level.When you look at the way Asia has grown over the course of the last 7 years when the global economy has been in trouble, it is quite remarkable that it produces dollar returns in excess of the US over the last 40 years. I think that story is just beginning.Q: Europe – do you think that you are going to see way more fissiparous tendencies and that might jolt the financial markets in 2017 or will the markets go on unruffled?A: Big surprises of 2016 were two unexpected results – Brexit and Donald Trump. There is too much speculation on other side, as I said the Nation Front in France it is expected that that might be a surprise as well. If you expect a surprise, it is not a surprise and the fact is that there is a much better system in France to make sure that somebody like Le Pen does not get elected. I am pretty confident that we are going to actually see a settling of concerns about Europe over the course of this year. Probably once in the last 7 years I wouldn’t be short on Europe. Q: Let me now come to the India question. What is your sense of the Indian economy's growth in 2017? Do you think the growth story was badly unsettled or jarred by the demonetisation experiment or do you think the growth story is safe regardless? A: It did not jar the structural story of India. I am so positive about the demographics, the people here, the business attitude, the desire to grow, the desire for wealth. There is nothing that can really derail that for me, in terms of an India story. Governments are always there to unsettle you from time to time and certainly the demonetisation exercise was unsettling. It was a surprise in particular to me, just in terms of the timing because we had gone through a pretty weak period of capital goods investment and capital goods production. The thing that was holding growth together in India was a consumption story and of course, demonetisation, if anything, was going to derail the consumption story. So, it was a bit of a surprise in terms of timing, but I suspect it was much more to do with politics than it was to do with economics in that respect. However, having said that, the great news going forward into 2017 is that we have had a good monsoon. The monsoon, in my view, is a much bigger issue as regards fiscal expenditure than economic growth generally. Two bad monsoons in a row meant that the government had to divert resources towards rural income support. The good monsoon this year has meant that the government can now focus on capital spending, infrastructure spending, boosting the economy and that means that the demonetisation downside is probably going to be much more limited than people were perhaps, expecting in November, 2016. So, as long as that happens and that is what the Budget was suggesting, we may have a very pleasant experience with Indian growth in 2017 and even better going into 2018 and 2019. Q: Would you say that India will not get any help in terms of even further lower cost of money? Do you think the Reserve Bank of India (RBI) is at the end of the rate cutting cycle? A: One of the things we look at is rather than the official interest rates, we look at what we call real lending rates. We calculate these on the basis of existing lending rate in India deflated by the nominal gross domestic product (GDP) growth rate. And interestingly over the last few quarters, those real lending rates have been falling. In fact, India's real lending rates are really quite appropriate at the moment. Of course, also that is the case that despite the central bank holding off in the last two meetings, lending rates in the banking system have come down because liquidity in the banking system has gone up. So I would say interest rates are pretty appropriate just now. I do not know whether the central bank really needs to do very much more. Personally I may have wanted them to cut another 25-50 basis points, but I do not think there is any rush to do that and I do not think there is any great necessity that that should happen. The outlook for growth is fine. The interest rate signal is good. The external balance has improved dramatically when we take into account direct investment flows and India is actually looking really pretty good going into 2017. Q: Private capital investment has not been forthcoming and a large number of banks, especially banks that lend to companies are faced with a lot of default bad debt. Would that stymie lending? Would that be a bottleneck? A: I am not quite certain that the private sector is going to be the sector that is going to step up in terms of their investment cycle in the near-term. Really the government is in the driving seat on this and that has certainly been signalled by the Budget as well. But if the government does get its act together and starts moving in a higher gear in that respect, then we should expect the private sector to follow because economic activity will pick up. As I see it, when we look at the real lending rate picture in India, it is really not a hurdle for the private investment side to start moving. More of a hurdle in indeed the bad debts in the banking system and more is going to be done over the course of this year to address that issue with a recognition of non-performing loans coming in in April. The private sector is probably going to lag the public sector in this cycle as regards the investment upturn. But I am pretty certain that once the investment upturn is signalled, the private sector will be jumping in on the back of that fairly quickly given where interest rates are. Q: Typically, in a country or an economy at this stage, what should investors be looking for, what kind of sectors? Should they be chasing consumption stocks, should they be chasing finance stocks, private sector, public sector, what would you have them chase? A: I still think that industrials are going to be good plays in India over the course of the next couple of years. The investment cycle that will be kick started by the government will play right through into the industrials and to capital goods industries. I have always been a bit shy of seeing that it is a good time to buy financials. But one of the recommendations that we made to clients at the beginning of this year was a high conviction global strategy trade of being short European financials and long Indian financials which really play into the theme that we put out into our year-end strategy report which we call 'World War 3'. By the way, nothing to do with Donald Trump, but more the fact that there is a real force of demographics positive for India and negative for other parts of the world including Europe. This is a time that people should be loading up on Indian financials and just holding them for the next 20 years. Q: Speaking about making money in India and let me end where we began with global impulses, especially impulses from the US. IT, infotech has made a lot of money for investors in India for the last two decades. The Donald Trump policies look like stymieing that, his visa policies as well as isolationist policies. Would you bet on IT in particular and in general, do you think Donald Trump can stymie trade and stymie global growth? A: At some point, Mr Trump is going to come to his sense and see where his bread is buttered. Refusing visas to Indian IT engineers and entrepreneurs is one way of making sure the US economy just falls flat on its face again. We all have enough advisors out there telling him that this is going to be a silly policy that is to the detriment of making America great again rather than to its benefit. If on the other hand, they do not do that and he continues with his policies to stop people coming into the country, maybe Indians are just going to stay home and make the money here and look to the domestic economy and the rest of the world as places for Indian IT to be sold and I would be very comfortable with that. Q: Since you are such a close India watcher, let me just add one last question. There are a spate of state elections, provincial elections that are happening in India. If it were to happen that the current ruling party, the NDA, does not quite make it in all the big states, would you worry or would you use that as an opportunity only to add more to Indian investments. A: It may unsettle some foreign investors and maybe some Indian investors if the current government does not win in these elections. But to be quite honest, for us, this has never been a story about the Modi government or the BJP, it has always been a story about the platform that India starts from today relative to other countries and the rest of the world, the youth of the country, the stage that the country is at in its development and in its cycle. For me the political side is much more a sideshow. The structural story of India is as sound under a BJP government as any other government.