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| Q&A: Geoff Lewis, JPMorgan | | 'People are writing off the US too soon' |
| Ram Prasad Sahu / Mumbai Aug 31, 2010, 00:11 IST |
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 With key US economic indicators not looking too good and signs of a slowdown visible in other economies, analysts are talking about the possibility of a double dip. With investors pulling out money from emerging markets, will the situation go from bad to worse in the near future? JPMorgan Vice-President and Head (Investment Services) Geoff Lewis tells Ram Prasad Sahu the situation is not as dire as is being made out and there is no danger of the key world economies sinking into recession again. Edited excerpts:
Given the poor global economic data in recent weeks, what are the chances of a double dip?
Despite recent news flow, there has been a global recovery led by emerging economies. There is nothing in world trade to suggest things are going badly wrong. There is a lot of media talk of double dip — meaning a return to recession or failure of recovery to take hold. Statistically, these are rare. In the post-war period, this took place only once in 1981 due to US monetary policy. Statistical models put the chance of a return to recession between 0-10 per cent. The major risk would be a policy mistake, too much fiscal tightening, too soon.
But the recovery in the US is muted...
Though business investments in the US are growing at 20 per cent annualised rates for three quarters now, it is such a small part of the US GDP (seven-nine per cent) that there is not enough leverage to drive the US economy. You need a recovery in consumer demand and, at the moment, households are still trying to de-leverage and pay their debts and build up their savings. We are likely to have another 18 months of sub-par growth. Then, if confidence comes back, things will improve at the consumer level. At the corporate level, things are better with record margins, free cash flows, strong return on equity and productivity growth. Consumers have to improve their balance sheet, then we will have a recovery. People are writing off the US too soon, it is a very flexible and dynamic economy, and shouldn’t be written off because of the housing bust.
Would the slow US recovery impact emerging market growth?
What we have seen is a degree of economic decoupling. Emerging markets are not totally dependent on the developed markets. A 2.5 per cent US growth is good enough. Looking at Europe, there hasn’t been a year after 2000 where it has contributed more than 10 per cent to global GDP growth and, in the last two years, it has contributed nothing. For the world economy, what matters is Germany, not small economies like Greece, Portugal or Spain. Emerging markets such as India have reached a point of economic take-off, a critical mass and momentum that will help it keep going. It is a good thing that the US and Europe are growing at a moderate sub-par rate. If the US was growing at five-six per cent as it does after a deep recession, and Europe was growing at three per cent, commodity prices would go through the roof and that would not be good for emerging markets. These scenarios allow them to grow without energy constraints.
Given the current situation, which sectors would be your best bets in emerging markets?
Consumer sectors and financials, as they do not have balance sheet problems, or did not have a lot of structured products and have a reasonable loan-to-deposit ratio. Banks, consumer, infrastructure – in preference to exports – would be the picks for our emerging markets portfolio. The key concerns for India are imported energy costs and food inflation. Retail investors should not look at the rear view mirror, they should look beyond the recovery. As far as the yellow metal is concerned, it is the best proxy currency available since dollar, yen and the euro do not have great fundamentals and you should have a proportion of your investments in it. From a tactical viewpoint, have some cash so that you can invest it at a better level.
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