“Trump Is Like Brexit For The U.S.” Says Top Global Fund Manager, Labels India A “Safe Bet”

Well, I am trying to make an exaggerated point which is that central banks' involvement in the financial markets is going to be with us for quite some time. And it's going to a lot longer than what people are anticipating because we are in a bind on a global basis where we have very high levels of leverage and slow economic growth. So, central banks are going to be critical and they are going to be part of the capital market for a long, long time.

So, it really is a question of defining of what success is. If success is going to be that central banks on their own would be able to revive growth on a global basis, that was a very unrealistic expectation. I think coming out of the financial crisis, the first thing that the central banks had to do was to ensure that we didn't get into a deep economic hole. And in that regard, they were phenomenally successful. Subsequently to that, they have stabilised the market They have succeeded partially but even if you ask them, they would tell you that the likelihood of they on their own would be able to fix the demand side of their economies, which is what ails us, isn't truly realistic.

A deep financial hole would be if the U.S. economy would have contracted by 5-6 percentage points. A deep financial hole would have been if we faced depression. And we certainly didn't do that and in the financial crisis, if they hadn't taken very concerted and proactive actions, that was the true risk. I distinctively remember having conference calls where we were trying to figure out how the banks would close business on a global basis? How things would work out in Japan if the sun rises? So, all of that didn't happen because of central banks' intervention.

The key point in this regard is that central banks cannot alone solve the demand deficiency problem that the world faces. What they can do is to hold off the worst case scenario for as long as they possibly can, until politicians come together to take a concerted fiscal action. When that would happen is an open question for the moment.

I think, the Fed is independent enough to make policy decisions primarily based on what it believes the economy requires. And the elections aren't a critical point. My bet is that they don't do anything in December. We will see how that turns out.

I think they are still data dependent and my expectation is that the data in the fourth quarter is actually going to slow rather than re-accelerate, which is what needs to happen for them to do anything. If you look at some of the now cast numbers, we are talking about 1.25 -1.5 percent growth in the U.S. in the fourth quarter, and that's not the type of environment where you tighten the policy.

I think initially that's what they would say. My position would be that the likelihood that the Fed raises rates in a concerted way, they may do one or two at some point, but the likelihood of them raising the rates in a concerted way is very small. And if they do that, they will basically take down the U.S. economy.

Our recommendation is that global equity is the place to be for long term investors because this environment is really conducive for asset prices to go up. And, we believe that the best opportunities are in the U.S.. The U.S. has the most growth potential and the valuations in the emerging markets used to be extraordinarily cheap, they are not anymore, in places like India they are not anymore. But valuations in other emerging markets are quite attractive; so a barbell of U.S. and emerging markets. 

So, if you remember what had happened after the big correction of February 2016, some of the value equities did very, very well. Commodity producers, oil producers had a substantial rally and the thinking was that because of the rally, the attractiveness of value would continue. My point is that it is already done. What we are dealing with in this world is the fact that the growth is missing, and people are more than happy to pay a good premium for that potential growth. And therefore value recovered from a deep draw down, but going forward it would be still be about growth; tech, internet, Chinese consumers and things like that.

Yes, indeed. India is the place where everybody who wants to invest in the emerging market but is too scared to invest in emerging markets is hiding. And that has been the case for quite some time. Because it's the safest bet in the emerging market. The country's is growing at a reasonably rapid rate, you have policy support and the potential of structural reforms, something that we talked earlier-every three years in respect to India, that has attracted a significant amount of flows in India. Whether, it would stay that way is an open question. For now, India is a safe bet. If other emerging markets start growing at a better pace or if India fails to deliver, then the equation might change.

As mentioned earlier, we have substantial amounts of investments in India. We have been doing this for decades and if we find company level opportunities, and we will focus far more on companies than countries itself, we will continue to do that. Having said that, as mentioned earlier, valuations in India aren't cheap either and therefore the attraction of India as an equity destination at the moment for us, for long term players who go on valuation, is very tough. Having said that, I think the fixed income markets in India are very attractive. Because you have a situation here where central banks have credibility, the inflation problem is slowly fading to some extent (once you strip out food prices etc.). If inflation continues to go down, the likelihood of rates going down in India are quite substantial. Therefore, from a fixed income perspective, India is one of our favourite markets.

We use lots of vehicles to make that investment; we don't necessarily have to go out and buy bonds in the Indian market. We can do that via derivatives. We have reasonable positions in the Indian fixed income market and we continue to increase our position.

Absolutely! Here's the logic. We believe that this low interest rate environment will be with us for a long period of time. So, looking for new opportunities to invest in debt capital is something we spend a lot of time on. Unfortunately, there aren't many too many very large corporate markets out there where the probability of that market getting created exists. China is one, Brazil is the other, however both these countries are dealing with specific structural issues. India, on the other hand, this would be great. I think if the Indian capital markets, especially in the corporate sector, deepened and the size and the liquidity increased, you will see a significant amount of flows from overseas investors, in rupee corporate markets compared to just dollar Indian market.

Absolutely. We are looking for such opportunities all over the world where we think we can invest and where liquidity wouldn't end up as a bottle neck. And if Indian capital markets develop, we would certainly consider it.

So, it's a question of half full and half empty. There are lots of positive things that we can look at, and if you want you can scare the living daylights out of yourself by looking at all the negatives. I think, India is a at a pivoting point. That is, if it can deliver some structural reforms, then the likelihood of foreign investors coming to India, in FDI or portfolio flows in a big way, the likelihood of that is as large as it has been at any point. For two reasons - there is plenty of liquidity on a global basis to be deployed in good destinations and second, India's biggest competitor for capital flows was China and China is in a corner itself. So, the field is open if the policy makers can deliver. And they don't have to deliver the whole package in one day; as long as they can continue to make progress and demonstrate to foreign investors that they can move forward, I think the equation can change quite rapidly.

Yes, for us it is more about specific companies, far more than the countries and the large stock exchange indices. We buy companies that we are going to hold or 10-20 years, so it's very company specific. Having said that, people have to remember that Indian markets can't be just in the Indian context; there has to be a global context as well. So, for Indian markets to continue to do well, equities overall, on a global basis, have to continue to do well. That is our expectation, that may happen. But if that is not how things pan out, then Indian markets cannot continue to go up on their own.

I don't know the magnitude we can debate that. But my expectation would be higher rather than lower.

A few of them. One, basically a global shock. So, whether it is a policy shock or some form of Brexit in another country, politics in the U.S...

A Trump presidency initially would probably be somewhat disconcerting. I tell people Trump is like Brexit for the U.S., not because policy implications are that bad, if he brings fiscal policy into play that may actually help. But the uncertainty itself may end up be quite a drawdown at the beginning. Having said that for India the real question is whether the policy makers do all the things that everyone expects them to do. So, if Mr. Patel (Urjit Patel, RBI Governor) moves away from the path that was chosen by the previous governor, that is going to be a problem. If there is a significant issue with respect to politics and how the BJP ends up playing things out, that might end up being a problem. A lot of it is under Indian control and some of it isn't under Indian control.