Indian equities markets nearly made all-time highs, and have been hanging around those levels for a while. Ed Yardeni, President of Yardeni Research, believes the markets have already priced in future gains that may come from current geopolitical situations. Nonetheless, India presents long-term opportunities for investors, at a time when there are long-term concerns about China.
Here are some edited excerpts from Edward Yardeni’s conversation with Moneycontrol's Senior Consulting Editor N Mahalakshmi, on why India outshines China in the geopolitical landscape and is the preferred investment destination.
ML: How do you size up the Indian opportunity in the context of China at present? How do you see the opportunity vs what the stocks are already pricing in?
ED: Markets think ahead. We have clearly seen markets anticipating that India will be one of the beneficiaries of the geopolitical tensions between China and the United States, Australia, and the Western world. India is a democracy and has a great demographic profile. There is more that can be done on infrastructure clearly. But to the extent India looks like an alternative to China, money will flow to India. Things will continue to improve and present opportunities for global investors as well as domestic investors. The markets have already figured that out. So it’s hard to say that this is an opportunity that hasn’t been discovered. But that doesn’t mean that it won’t be a long-term opportunity. Just the same way I have long-term concerns about China, I have long-term optimism about India.
ML: How do you see the US credit downgrade from Fitch? Could that make some impact on investor behaviour in the future? Despite the dollar being the weaker currency, investors still seem to take refuge in the dollar. How do you see this time as being different?
ED: Over 40 years as an economist and investment strategist, I have often been asked about the federal deficit, and more often than not people ask me ‘Why don’t I seem to be as concerned as they are about the deficit?’ And my response has typically been ‘I will care about it when the markets care about it’. The reality is some of our most significant declines in interest rates occurred when the federal deficits were expanding. And clearly, that had a lot to do with the business cycle. During recessions, federal deficits tend to widen and interest rates tend to go down. What’s different this time is that we are not in a recession and yet we had a tremendous amount of fiscal stimuli, tremendous amounts of increase in fiscal outlays. That’s really showing up in the federal deficit widening significantly without a recession.
So the financial markets seem to be becoming more concerned. I think the Fitch rating downgrading of the US debt brought a lot of these things to the fore. Everybody knows that we have a lack of discipline in the United States Congress in terms of spending. So this is not news. But then again it is different this time to the extent that we had a lot of fiscal spending before recession ever occurred. It's one of the reasons that recession is not occurring. Of course, if we do get into recession the deficit is going to be larger. But we still are hanging around 4 percent. We managed to finance some of the auctions relatively well. So I’m concerned but I don’t think it's going to be an immediate problem for the economy or for the financial markets.
Also See | Edward Yardeni On Why India Outshines China, Is The Best Investment Destination | Expert Talk
ML: Do you see any permanent changes in the way asset managers allocate assets across developed markets and emerging markets? Is that a permanent trend irrespective of the concerns about the dollar? Do you think there is going to be a permanent shift favouring emerging markets?
ED: It’s an interesting question because here in the US, the investors who stay focused on the US, are wondering what to do in the market when we have 8 stocks that account for something like 27 percent of the market capitalization of the S&P 500. I call them the mega-cap 8. Most professional and individual investors try to have a diversified portfolio. But at the same time when benchmarking yourself to the S&P 500, it’s pretty hard to beat that portfolio unless you concentrate your bets on a handful of stocks. Global investors have these same issues. The mega-cap 8 stocks have been one of the reasons that the US markets have outperformed most of the other markets in the past few years. So investors are trying to figure out what to do here. After the rebound we saw in mega-cap 8, it’s hard to buy them aggressively because they are already quite expensive.
So I do think that there are some global investors looking around for alternative opportunities that present better value. Clearly, emerging markets are cheaper than the US market. But so are the other markets. The Japanese market until recently was cheaper. The European markets were cheaper. But a lot of this cheapness is because of the mega-cap 8 stocks. With the mega-cap 8 stocks, we have a forward multiple of about 19-19.5 on the S&P 500. Without them, we have a multiple of 16.5 which is a little more reasonable.
So I think there is plenty of room for global diversification. I think on a global basis, the investors are struggling with China. Do they want to invest in China at all, given the government has taken a severe stance towards business, regulating and supervising business much more closely in a way that makes it hard to do business in China?
So we do know that companies are looking to leave China to find other places to produce. Investors have to decide what that implies for investing and I think many of them are concluding that they want to be less exposed to China. As it is, China’s economy is in trouble. The data that has come out recently suggests that they are in a mild recession, maybe even a severe recession and a lot of that had to do with their property market. Problems in their property market are depressing their consumers and so I personally think China is not a good place to invest in right now. Both because of their economy and because of their government’s attitude towards business and investing. Obviously, that benefits other countries. Countries like India, Brazil and some of the other emerging markets.
ML: The SVB episode earlier this year raised worries in the markets about more such likely accidents, but that hasn’t happened. How is it that the steepest rate climb in history hasn’t broken anything of consequence?
ED: A lot of the pessimists have been looking at the inverted yield curve, saying that historically that has always worked for the past eight cycles in predicting a recession. I don't think the yield curves predict recessions. I think it predicts a process that leads to a recession. Why would anybody in their right mind buy a 10-year bond yielding less than a two-year? That's because they don't think the two-year rate's going to be staying up over the next 10 years. They think the two-year is going to fall and they think the 10-year bond yield is a pretty good rate to lock in for the next 10 years. And so the current and the past inverted deal curves signalled that if the Fed can continue to raise short-term interest rates, something will break in the financial system, which will cause an economy-wide credit crunch, which then causes a recession.
This time around the yield curve has been right on the money. We have a financial crisis, we have a banking crisis. But the Fed came in with liquidity very quickly and calmed the situation down significantly. Banking credit is tightening. But we're not seeing an economy-wide credit crunch, as a result, we're not seeing an economy-wide recession. So I think that's how this time it has so far been different from the past. I'm not going to tell you that there's no way we're going to have a recession, it still could happen. It would require the consumer to significantly retrench and right now the labour market is just too strong to really conclude that the consumer is suddenly going to stop spending and meanwhile we've got a lot of fiscal stimuli, a lot of onshoring, we've got a lot of capital spending. As a result, put it all together and I think the economy continues to grow with inflation continuing to come down and I think the Federal Reserve is done.
Also Read | Market hopes to see 25bps hike in Fed rate tomorrow, all eyes on commentary: Ed Yardeni
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