The US Federal Reserve followed through on an expected interest-rate increase and raised their forecast for economic growth in 2018. The Central Bank has also projected for three hikes in the coming year.
In an interview with CNBC-TV18, Shane Oliver, Head - Investment Strategy & Chief Economist at AMP Capital Investors and Seth R Freeman, CEO and Chief Investment Officer at EM Capital Management shared their views and readings on the same.
Also watch Katalin Gingold of Cartica Capital and Mark Matthews of Bank Julius Baer discussed about the same as well as shared their outlook on Gujarat Elections' possible outcome.
Below is the verbatim transcript of the interview.
Latha: How should an emerging market investor read the happenings in both, the Fed as well as in the White House in Capitol Hill?
Matthews: Both are positive. On the one hand, the Federal Reserve did acknowledge that tax cuts will accelerate gross domestic product (GDP) growth and reduce unemployment. But at the same time, they basically have not changed their forecast for interest rates next year or the year after and there were two dissenters, so Kashkari and Evans were the two voting members who asked that they not raise rates.
So on balance, you have got a still dovish Federal Reserve at the same time as the tax cuts look like they are really going to happen and that probably the much bigger surprise because I think the consensus was that they would not happen, that it was too complicated, there were too many differing voices in Congress, but it looks like they will be cutting the top rate of individual income tax from 39 to 37 and then the effective corporate tax rate will go from 27 to 21. And of course, 27 to 21, that is a very big drop. It makes the US globally competitive.
Sonia: What is your own view? Do you think the double impact of tax cuts and a higher GDP growth that came in from the outlook is something that could take equity markets higher in the near-term?
Gingold: I think they could but not really because of the higher GDP growth or because of the tax cut, but because of this very accommodative monetary policy will remain and tightening will be very gradual. So I think that global synchronised recovery, good real economy, low inflation, will remain and the Fed will tighten very gradually. So, in a sense, today's announcement has not really changed our view in terms of our outlook for equities and especially global equities.
Anuj: If you are following the Indian politics, we have an important state election which is going through and today is of course, the second phase of that. Your thoughts on whether that has the potential to change things here?
Matthews: Yes it would if BJP lost Gujarat after having it for two decades and obviously the Prime Minister comes from there, the market reaction would be bad because people would start to worry about the general election in 2019 and people would worry that in order to win the general election in 2019, the government would embrace much more populous policies which would widen the budget deficit.
Latha: We have this important state election that is underway, results due on Monday. How are you approaching that? Can an adverse vote against the BJP change your investments in India?
Gingold: I do not think it will change our investments because we are very long-term focused and we really do believe in the long-term secular story of India. We do not change the portfolio very frequently. Clearly the Gujarat elections are very important and would have implications in terms of our beliefs whether the reforms that Modi has started will continue or not, we do not think we will lose or BJP will lose the Gujarat elections, but clearly the volatility could be higher going forward if there is more uncertainty over the political capital and strength of BJP in the coming state elections in the next year.
Sonia: So since you did mention that you believe in the long-term story of India, have you recently increased your allocation to the Indian market and what kind of an upside do you foresee?
Gingold: We have not increased our allocation. We have been really stable over the year and we were very surprised how well India has done this year given it has really missed out, at least the economy has missed out most of the cyclical recovery that we have seen everywhere else. We maintain our allocation nevertheless. We see very interesting sector-specific and company-specific drivers that give us high double digit earnings growth and we think these are sustainable for years to come so this is sort of the return expectations over the medium term that we have for our Indian holdings.
Anuj: In that case, how would your portfolio approach be for India? We have seen financials and consumption drive the market rally. Is that likely to continue?
Gingold: Yes, we remain invested in these two sectors. I spend really very little time thinking about which sectors will do well and which sectors will not. I am really more focused on the company specific drivers. But broadly, these two sectors have very strong secular drivers, very strong cyclical drivers as well.
Our consumer companies are doing very well because they are taking market share from the unorganised sector. Our financials are doing well because they are benefitting from this massive move into financial assets. And I think these both, cyclical and structural background remains very positive for this sector. So I do not see why they cannot continue performing very well. If they are delivering the earnings growth, there is no reasons they should derate.
Latha: How are you looking at life beyond elections? As you point out, a loss for the BJP would perhaps hit the market in the near-term, but how much of a downside at all are you expecting and will the Indian market once again start looking only at the other factors, the global markets, the Fed, global growth and the yield curve in India.
Matthews: If the BJP lost Gujarat, I would say there would be between 10 and 15 percent downside in the Indian stock market and long-term, I find it difficult to believe that we will get a 2018 as good as 2017 because 2017 was really good and it is hard to get two of those in a row. Sometimes you can, but the market is 15 percent more expensive than it was at the beginning of the year. There is good earnings growth, that is true. So, I would say that it should be a good year next year, but not as good as the one that we are exiting now.
Sonia: You were telling us about some of your top holdings in the Indian markets and you do have holdings in names like TVS Motor Company, Marico, Shree Cements, Page Industries. A lot of these companies are very rural focused. What is the story there? Do you see a significant pick up in terms of rural demand over the course of the first half of 2018 and would you stick to some of these names despite the gains that they have given?
Gingold: We are sticking to them and really the story for us is not the rural pick up. We are not particularly bullish on the rural economy. There could be some cyclical pick up for sure because of the agriculture economy, but the years of the Congress, when rural economy was roaring because of a lot of handouts and very high price increases are way behind us, so it is really not a structural, more of a short-term cyclical issue.
Nevertheless, our mains are doing very well. They are not only exposed to the rural economy and I think the rural economy will find a much more sustainable growth driver over time as the capex cycle in India picks up and that will generate a lot of jobs and a lot of those jobs will be in the rural economy. That being said, it is probably not a very near-term story. We do not really see a recovery in the capex cycle in the near-term, but longer term, we are quite positive that it will find a more stable footing. Nevertheless, our stock holdings are not because of the rural economy exposure.
Latha: Are you shuffling your positions in India? We have after all seen an increase in yields and an uptick in Indian inflation.
Matthews: Now we have not made any changes, but the major difference for me was in July when the public sector bank recapitalisation was announced and we now like the public sector banks in general. They are all, with the exception of SBI, well below their highs of the previous 10 years and so that is one sector that we have become attracted to in light of the policy changes.
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