Hans Goetti, Director of Citigroup, says that fund flows are coming back into emerging markets. He says that the Fed is near the end of the tightening cycle, however they may hike rates by another 25 bps later this year.
According to him, India is the most attractive among emerging markets. He says that India is not cheap, but attractive to long-term investors and has a favourable composition of imports.
He further adds that India's current account deficit as a percentage of GDP is lower than other emerging markets, but the RBI has acted well to contain inflation.
Excerpts from CNBC-TV18's exclusive interview with Hans Goetti:
Are you feeling a bit more comfortable about equities generally after what's transpired in the last 3-4 weeks?
It is absolutely right to say that the risk premium has receded somewhat and investor optimism has returned to a certain degree. We are particularly bullish about matured markets such as the US and Europe as well as Japan. We have started to get a bit more bullish on emerging markets, we see some fund flows coming into emerging markets and I think that is quite encouraging.
Has the call on global interest rates changed in the light of the last Fed meeting and what has come through after that, or does it still remain quite indeterminate for you?
As far as the US rates are concerned, the Fed is obviously near the end of its tightening cycle. We may see another 25-basis point increase, maybe not by September, but a little later.
At the same time, the European Central Bank and the Bank of Japan are tightening policies, but I think the Fed here is the key factor. If the Fed stops raising rates, the US economy, which we expect to slow down in the second half, may actually engineer a soft landing. And that will also be extremely good news for emerging markets.
For India in specific, what have you heard by way of increased fund flows or even new funds that might have opened?
We have seen increased fund flows over the last few weeks in all emerging markets, but particularly India. India has almost been a standout, and again global investors have made a judgment that among all emerging markets, they are bullish on India as it seems relatively more attractive.
India comes out pretty much on the top of the list for various reasons. First of all, corporate earnings growth is very strong. When you look at valuations, all of a sudden they are not looking as demanding anymore as they used to because earnings growth will catch up with reality. So on that score we are getting more bullish and more constructive particularly on India.
Given what was reported in terms of earnings this time around and the point that you made about valuations, what is the call on India and what sort of levels would you still be comfortable with?
Actually the current levels for long-term investors are not bad levels to get in. As I said, valuations are more attractive, it doesn't mean valuations are cheap, but again we have the support from the strong earnings growth. Also,
For instance, subsidiaries or real estate holding and so on, if you factor that in, there is tremendous value in the Indian market. Having said that, we think that India is not cheap yet, but for a long-term investor it's getting attractive to look at again.
If that is the view, do you expect the Indian market to reclaim its lost ground and hit a new high any time soon and would that be the view for other emerging Asian markets as well? Could they reclaim all the ground that they lost in that correction?
I think that we have to make distinctions among emerging markets. India is pretty much at the top of the list. We look at the issues that the emerging markets are facing. One of the biggest issues is current account deficits.
India has a current account deficit but in relation as a percentage of GDP, it is much lower than that of any other emerging market. Also, the composition of imports is very favourable because India imports a lot of capital goods, which will support economic growth in the future.
I think that all the emerging markets are faced with the problem of inflation. There again, in India, the Central Bank has done a great job in raising interest rates early enough, as far back as in 2004, to prevent inflation from getting out of control. So these are the things that we have to take into consideration.
Whether we go to a new high any time soon remains to be seen, but India is very well supported, based on fundamentals and also based on relative considerations versus other emerging markets.
One concern that seems to come out from most global brokerages at this point, is the lack of government policy action. Do you think that is an important factor or do you think earnings in this market will move aside from that or in spite of that?
We think that the earnings are a much more important factor. I am not sure how much government activism can add value. I think if you let the free economy decide for itself, that is always the best driver for asset prices. I think that earnings growth in particular is one of the features as I have mentioned and that makes us feel much more optimistic.
The correction that we have seen has actually cleared. Yet to a certain extent, not only has hot money left India and some of the domestic investors have de-leveraged, but they have actually put the whole market on a more solid footing.
How much of global optimism of the last few days, last few weeks is present because of crude cooling down to about $70?
There are several facts, one has to do with relatively favourable inflation news out of the United States, but crude oil is certainly a factor as well. The geopolitical tensions, which were very high a few days ago, have not disappeared but they have receded somewhat and that helps crude and that is certainly one of the facts behind this renewed optimism.
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