Whenever India has experienced near-zero or negative real interest rates, gold has done well
Volatile stock markets, falling bond yields and rising gold prices have made many investors take notice of the deteriorating macroeconomic situation worldwide. Ritesh Jain, former CIO, Global Macro Investor and blogger at Worldoutofwhack.com shared his thoughts on the changing global investment landscape in an interview with Nikhil Walavalkar. Excerpts:
Q: Is the world economy slipping into a recession? Why?
A: The World, excluding the US, is heading into a recession. It is not slowdown, it is actually a recession. Europe is in recession. There are three data points you should observe. First is the purchasing manager index (PMI). You get PMI for manufacturing and you get it for services too. Except for the US and India, the PMI for most other large economies is below 50. A number below 50 is contraction and a figure above 50 indicates expansion.
Next is the yield curve. Historically, it has been a prominent recession signal. If the long-term yield is lower than the short term yield, then you can witness a recession in next 18 to 24 months. This phenomenon is termed the inverted yield curve. Barring the US, all major developed economies are experiencing flat yield or inverted yield curves.
The third factor is world trade, which is on a standstill.
The US started expanding in 2009-2010. We have not witnessed a recession since then. The average period of expansion is not more than six years. We are in the longest ever expansion phase led by the US, because the central bankers all over the world started cutting interest rates. Initially, the monetary policy measures such as rate cuts worked, but subsequently didn’t. That should lead us into a recession.
But if there is fiscal expansion adopted by those countries like the way India cut corporate tax, recession may be avoided. If we see increased fiscal spending coming in global economy, then the current slowdown will be short-lived.
If the fiscal spending takes place and it leads to private capital expenditure, which in turn creates jobs, increases liquidity in the system and increases tax revenue of the government, then the recession fears will not materialise.
Q: What is your outlook for gold? Why is there a sudden interest in gold?
A: Interest rates are near zero and have turned negative in many countries. If you believe that the government policies are not working, you think that government will do something stupid or may resort to some fiscal spending, then you should look at gold.
Indians should have around 15 per cent to 20 per cent of their investments in gold as a part of asset allocation which in normal times should not be more than 5-10 per cent. If you believe that the real rate of interest (nominal rate of interest minus inflation) would go down, you should have higher allocation to gold. Whenever India has experienced near-zero or negative real interest rates, gold has done well.
Q: What is your view on interest rates in India? Will global slowdown expectations and negative yields will have a negative impact on interest rates in India?
A: If you have a loose fiscal policy, then you cannot have loose monetary policy. You cannot have massive increase in government spending and simultaneously see big cuts in interest rates. Government has already announced cuts in corporate taxes. Cut in interest rates won’t encourage borrowing beyond a point. So fiscal policy intervention is the need of the hour. Despite this, RBI will go for one more cut in interest rate.
Q: The credit environment in India has worsened. What will be the right approach to invest in the fixed income space?
A: Invest at the short end now. When there is no fiscal expansion, one should be present across the maturities. When the government is not spending much, it does not borrow much, which in turn results in RBI cutting interest rates. That makes a case for being invested in long-term bonds.
However things have changed after the government announced cut in corporate rate of income tax. Increased government spending also leads to increase in inflation. Hence one should avoid investing in long-term bonds and prefer investing in short-term debt.
Q: Is it a good time to diversify overseas for Indian investors?
A: When the nominal gross domestic product (GDP) was growing at 12 per cent to 15 per cent, there was no need for you to put your money abroad. But now the nominal GDP has been growing at around 7-9 per cent, which has a direct bearing on corporate profitability and in turn on equity market returns. You need some allocation to the other parts of the world. You need not get into stock picking. You can take exposure through exchange traded funds (ETF).
First, you will have some dollar exposure. Dollar is strong and it generally goes up against Indian rupee. Second is the meaningful diversification it provides. You have around 2000 listed ETFs in the US, apart from REITs, Artificial intelligence equities and many other exotic themes that are not available to a retail investor in India. You should have at least 10 per cent of your portfolio in overseas assets. You can also consider investing in overseas assets by tapping mutual fund schemes in India that invest overseas.
Q: Will the corporate tax cuts work for the economy and help grow corporate earnings?A: The US too did the same. But corporates in the US did not resort to capital expenditure. They chose to buy back their shares or pay out dividends. If the cut in corporate tax rates in India leads to private capital expenditure, I would say that these measures are working. Going by US’ experience, companies may choose to pay high dividends or go for buy-backs. We will come to know what happens in the next 12 to 18 months.