Growth stories are overwhelmingly in the EM universe: Cameron Brandt

Global equity markets have spent the year heading mainly in one direction - up - while the macroeconomic data of key markets has been mixed, at best, says Cameron Brandt

It has been an eventful first half for global financial markets that have braved volatile crude oil prices and escalating trade war tensions between the US and China. Back home, political uncertainty due to the general election kept investors on the edge. US-based CAMERON BRANDT, director of research at EPFR Global, tells Puneet Wadhwa that among emerging markets (EMs), funds dedicated to Russia, South Korea and China have experienced heavy redemptions while Saudi Arabia, India and Brazil equity funds attracted fresh money. Edited excerpts:
 
What is your assessment of fund flows thus far in CY19? Which regions have attracted flows and which markets have witnessed outflows?

 
Very defensive. Global equity markets have spent the year heading mainly in one direction — up — while the macroeconomic data of key markets has been mixed, at best. Mutual fund investors so far have acted on the data, which shows GDP (gross domestic product) growth losing momentum in Europe and China, rather than chase rising markets. The big loser has been Europe, with equity funds posting outflows in 67 of the past 70 weeks, as investors respond to uncertainties created by Brexit, weaker growth and the allure of populist politicians in the region. Among emerging markets, funds dedicated to Russia, Korea and China have experienced heavy redemptions, while Saudi Arabia, India and Brazil equity funds have attracted a solid amount of fresh money.

 

How have been flows in the equity and the debt segments over the past few months?
 
The shift from equity to bond funds is being driven by fears that this time, post the Great Financial Crisis (GFC) of 2007–08, the recovery really is rolling over. That apart, the accelerating pace of baby boomers in the US retiring and not wanting to leave their retirement funds at the mercy of equity markets have also seen investors shift from equity to bond funds.
 
Do you expect flows to EMs to outpace developed markets (DMs) by the end of CY19?

 
Yes, with major central banks in easing mode, fears over EM debt loads have receded, and investors remain yield hungry. The growth stories are overwhelmingly in the EM universe. Of the 40 fastest-growing economies in 2018, only one, Ireland, was a recognised developed market. EMs also have something of a monopoly on reform stories.
 
What is your outlook for hikes by the US Federal Reserve (US Fed)? Can the US slip into recession in 2020? Are the markets factoring this in?
 
The US Fed has said that sustaining the recovery is a key policy goal and small business optimism is still high as a result of the Donald Trump administration’s economic agenda (big businesses are much less enthused). And the economy has considerable momentum. So, I think the US economy is unlikely to slip into recession during the next 18 months. A sharp swing in favour of left-of-centre lawmakers and presidential candidates in the 2020 elections could, however, change that in a hurry.

 
Can you throw some light on the nature of flows into Indian equities over the past few months? Are investors here to stay?
 
I think they are. Reform story, being relatively underexposed to global trade, and a good demographic profile are all pluses for India at the current juncture. And flows have been generally positive for some time now.
 
In terms of sectors, which ones are on the investor’s radar in the Indian context?
 
Since the start of 2018, fund managers focused on the region have been rotating exposure from the information technology (IT) sector to financial, telecom and consumer discretionary plays.

 
What are the key concerns of foreign investors regarding India? Can these risks materialise over the next 12 months and trigger an outflow?
 
That Prime Minister Narendra Modi uses his mandate to consolidate power rather than take the politically painful decisions needed to unshackle India’s economy is a key concern for foreign investors. His willingness to keep rationalising subsidies, especially those relating to energy, and open more sectors to greater foreign involvement will be key yardsticks for investors, as will his willingness to respect the Reserve Bank of India’s (RBI’s) independence.
 
Is the overall slowdown in the Indian economy a worry?

 
The economic data is fragile. The headline number incorporates too much pre-election spending and not enough domestic capex, especially from private business. However, remittance flows remain a big plus.
 
What are your expectations from the upcoming Union Budget and from the government over the next five years?
 
The upcoming Budget is likely to be supportive—perhaps overly so— of the agricultural sector, relying on infrastructure spending rather than structural reforms to boost growth and making incremental rather than sweeping changes to existing regulatory regimes and tax structures. Unless the changes to LTCG (long-term capital gains) are dramatic, foreign investors will adjust. So I think ‘huge’ outflows are unlikely.