Prefer China over India, US to draw capital now: Goetti

Ekta: We were talking about the China-India debate and it seems as though China just can’t get enough of gains. It is at a seven year high, there is a trade surplus which has come in better than expectations in terms of data today. What is driving the Chinese markets and how would you pitch the India versus China story now?

A: Starting with India first we have had a tremendous run and expectations of all the good things to happen. India has this needed consolidation, if you will. Earnings growth in India has slowed down quite a bit and we are close to a bottom there when you look at earnings in relation to Gross Domestic Product (GDP). So, we are bottoming out there but the momentum right now is clearly in Chinese equities and that is mainly based on stimulus measures. We are looking at very high real interest rates.

Remember in China you have the PPI in deflation for 37 months in a row and there are still a lot of room for interest rates to come down. So the China story is based basically on fiscal and monetary stimulus and of course the outlook for foreign investors to come in and possibly the inclusion of A-shares in some of the global indexes.

Latha: So you expect that therefore some money intended for India could also go there. Is that how hedge funds and emerging market funds would look at the equation?

A: No, so far we have seen very little outflow out of Indian equities. Foreign investors look at India as a 5-10 year story, it is probably the most attractive story on that time horizon and therefore we have seen very little outflows out of India.

We don’t expect that necessarily to change but what could happen is that in the emerging markets universe we are going to see a rerating of China Asia and that again will depend what is happening Asia ratings in the indexes. Vanguard for instance has increased their share to China. FTSE has done it; MSCI decision comes tomorrow whether to include Asia. So, we will see, it is in that direction.

Latha: But if A-shares are included obviously somebody else’s weightage falls, doesn’t it?

A: That is correct, but it will evenly distributed across the board but we will have to see that happening first and even if A-shares are being included it starts very small. We are talking one percent inclusion first because the Chinese market cannot possibly absorb all the money that is bound to come in. So this is something that will take place over a number of years.

Ekta: How important is what is happening in Greece? Do you think that it will just be an isolated reaction if in case there is something more grave in terms of the negotiations that come through and hence limited to Europe and your expectations on the G-7 Summit meet also today, anything in terms of geopolitical rattles that we can expect because of the sanctions being in place for Russia?

A: What concerns the financial markets whatever is coming out of the G-7 probably will have to do with Greece. How tough they will be, there is a general political will to keep the European Union (EU) together and we still expect some kind of one minute before midnight deal. It will be going down to the wire, but what the markets are expecting is some kind of deal that kicks the can further down the road and alleviates the tension. If Greece were to exit, in the worst case of course that would have severe impact on a lot of other markets as well.

Latha: How are you reading the extraordinarily strong jobs data and the consequent rise in bond yields? As an emerging market investor what should we expect, outflows from EMs?

A: That is always the risk. We have an economy in the United States which is obviously firing on all cylinders. The non-farm payroll report was very strong and we have seen and are seeing recovery in the housing market and we are talking about an economy that should reaccelerate in second half.

Now whether that brings forward a rate hike by the Fed remains to be seen because the Fed cannot operate in vacuum, you will have to take the international situation into consideration. Whether it will do that is anybody’s guess but clearly it will attract money from outside and we have seen that in the rise of the US dollar already.

The US dollar increase of 20-25 percent in itself is a monetary tightening and has an impact on emerging markets. Yes, so capital flows may move to the United States.

Ekta: I didn’t quite get when you expect the Fed to possibly move. Earlier you were expecting September.

A: Our base case is September but the conviction is not very high. If you look at the US data in isolation you will say September makes a lot of sense but if you take into account the sharp increase in dollar which in itself is a policy tightening as a same effect and the situation outside United States and Eurozone for instance, we don’t know what happens with Greece.

Obviously by September we will know but this will be taken into consideration, we have a Chinese economy which is slowing down pretty dramatically, emerging markets are slowing down.

So the Fed will probably have to look at the global picture as well before taking a decision.

Latha: Are you at the moment a buyer or advising buy on India or would you wait for probably cheaper prices?

A: I am not sure whether India gets that much cheaper. Valuations are slightly below the ten year average. As I mentioned before corporate earnings have been slowing down in terms of percent to GDP from 2004 levels.

So, we could easily see corporate profits picking up, from a momentum perspective India is probably not the place to be right now. So the momentum is elsewhere, particularly China.

Ekta: What did you make of the Organization Of Petroleum Exporting Countries (OPEC) meet and the fact that Brent crude prices are down around six tenths of a percent at this point hovering at 62, what is your sense on Brent if you had to forecast it for the end of the year?

A: I would think we are going to be stuck in this trading range. I am not sure whether we are going to retest the lows that we had seen in March. Probably we may have seen the high for the year already. So, it is going to be a trading range, probably somewhere between 50 and 65 with the Saudis wanting to keep the oil price low and the decision not to increase the oil production was not a surprise to us.