The year 2011 has been a watershed for the Indian markets. What started with inflationary concerns has now blown into a full macroeconomic crisis. Despite this, countries like India, which will grow at a faster pace than some developed countries, stand a better chance. Given that the problems of the developed world will take some time to resolve, Roger Yeoman, head of institutional equities (Europe), Avendus Capital (UK), in an interview with Malini Bhupta, says things could turn for India, if it demonstrates the political will to move ahead. Edited excerpts:
What is your outlook for 2012 — both for the developed world and emerging economies like India?
It’s hard to argue equity markets are anything but cheap around the world. On the other hand, we are still faced with unprecedented strains in the developed world, caused by too much debt and too little economic growth. These problems will not be overcome in the short term, so we are likely to hear about numerous financial ‘accidents’ in the foreseeable future. And, this news flow is likely to keep a lid on valuations and stock market performance.
India appears stymied by political problems, like the recent reversal in retail foreign direct investment (FDI). Persistently high inflation and high interest rates will also continue to weigh on the Indian market. If high interest rates persist, this would eventually translate into higher non-performing loans (non-performing assets) for banks. A resolution to some of the political problems could be very positive for India.
Economic indicators across the world seem to be blinking red. How long is this slowdown going to last?
The debt time bomb took a long time to build and it will take a long time to defuse. This process will constitute a drag on final demand, so economies in Europe and, to a lesser extent, the US will grow at a tepid pace at best, probably for several years.
India is wrestling with high inflation and high twin deficits. High interest rates will act as a brake on growth, as we are seeing in headline numbers (index of industrial production and gross domestic product, etc). India’s problems are partly due to overheating. The boiling point is lower than it could be because of continuing lack of inward investment, partly caused by high interest rates and government paralysis, but also by a lack of international capital flows into India. I would argue these growth-related problems are easier to overcome than the debt difficulties confronting Europe.
Do you think Europe is nearing a resolution to its debt crisis?
There are two possible resolutions for Europe. The first is the ‘muddle through’ course being charted by politicians, which requires banks to be refinanced, as they take write-offs on their bond holdings. This requires a long time frame to spread the shocks out. The second involves dissolution of the euro. This would probably be disorderly, but it would allow countries with very different economic potentials and very different unit labour costs to develop at their own pace. I don’t know which outcome will win out, but neither inspires short-term optimism.
What is your view on the US and its growth prospects?
The US looks like it’s slowly turning the corner. Of course, it has its own debt problems, but Americans are innovative and growth could well pick up in 2012. This is a reason the dollar is performing so well. Given the lack of alternative reserve currencies, this trend in the dollar valuation is likely to persist.
How do you see the problems of Europe and the US affecting emerging economies like India?
The near-term impact of these problems has been transmitted through capital markets for the past four months and through foreign exchange markets for the past couple of months. Another aspect of these troubles may be seen through the potential weakening of demand in export markets. A possible positive effect would be the softening of commodity prices. Over the medium term, there could be improved prospects for sectors capable of leveraging opportunities arising from a possible rise in outsourcing or increased demand for low-cost manufactured goods.
How will equities perform in 2012?
The equities markets may be subject to a few conflicting forces. The concerns arising from economic crises tend to dampen demand for equities, but valuations look compelling in several markets around the world. The initial months of 2012 may see the tug of war between these forces, leading to continued volatility. Over the long term, countries with higher economic growth and stable political climate may be the early winners.
When do you see portfolio flows returning to India?
The latter half of 2012 could see flows to India returning. Relatively high economic growth creates a strong pull. This could translate into actual flows if additional conviction is created by an improved political climate and suitable economic legislation.
What is the biggest concern that foreign investors have about India?
The perception of political indecision seems to be emerging as a larger concern overwell-known economic ailments such as inflation and deceleration in the GDP. The latter could be viewed as largely cyclical in nature.
What can India do to attract portfolio flows?
Demonstrate the political will to move ahead in areas such as FDI and in enacting steps to tackle the constraints in investments, particularly in the infrastructure and power sectors.
