Jim O' Neill, the former British Commerce Secretary, who famously coined the term BRIC, told ET Now that markets have to tread with care this year in the face of a rising bond yield environment. Edited excerpts:
ET Now: 600 points gone on the Dow, what is happening? It was overdue, but this has come in a single shot?
Jim O' Neill: Well, I think it is reasonably straightforward to be honest and more and more data we see from a number of countries, particularly the United States, it is growing ever since that the central banks may need to tighten monetary policy faster than the markets have perceived. Yesterday's employment data was strong and in particular the attachment whether the wages are starting to accelerate more in the US means that the Fed may have to raise interest rates more and as a result, bond yields rise even more significantly…
So, equity markets are suffering from some competition in terms of investors for the first time in many many weeks… so that is the main reason and I think it comes on the back of this remarkable rally where we have actually no correction any week or any month. So, it is not overly surprising in my opinion whether it is the beginning of something more dramatic. In a very, very sustained sell-off, I think it is hard to say because in some ways if the equity markets were to do what they did just today for many days running, I think it would mean policymakers are worried that any acceleration in growth might only be temporary. So, I think the investor would be watching carefully rather than being overly excited one way or the other, but it confirms to me that the markets have to be a bit more careful this year than they have been for some weeks and months because of events riding on the rising yields.
ET Now: Problem is US growth continues to be sub-par than previous cycles, with inflation expected to rise, thereby increasing the base of hikes by the Fed. Would not that puncture then market sentiment prematurely?
Jim O' Neill : Well, I think there are a couple of things. First of all, it would be concerning if it is true that the underlying sustainable growth under the US economy is weaker than it was before. So, one of the things that the markets probably are worried about is that despite what you actually painted about the growth rates, unemployment is still falling and the employment market is very strong. So, that suggests there is a weaker productivity in the US than the past described.
Second more optimistic interpretation would be that while the latest GDP numbers were weaker than expected, it was primarily because of the big rise in inventories. Therefore, if demand growth is stronger and for a reasonable chance the first quarter growth in the US will be significantly above 3 per cent, either way until we see evidence of a bit softer growth and more importantly, the markets adjusting to the idea that maybe the Fed hikes rates four or five times this year instead of three, I suspect we are going to carry on with a more jittery equity market than we have seen.
Quickly to add is a lot of things going on outside the United States. I suspect another important part of this is that the European economy — particularly the Eurozone — is maintaining a level of economic growth which is much higher than most people's perception of trend growth and in my judgement, still higher than what the consensus is. So, there is some justifiable rising concern. I think this is not gaining as much attention in the media as the issues in the US, but it is probably just as important in my view.
ET Now: So, what sign would you look at to analyse and decide whether this is a short-term aberration or this is more like a structural sell-off and markets have peaked out?
Jim O' Neill: So, there are probably three separate things I personally will be looking at. It would be really interesting to see how this plays out in China. In my view, it's the economy that is probably adding more to global growth than even the US, and to know how the Chinese markets are and how fearful people are get of not coming to China is crucial. But markets suggest tighter Fed possibility than they have. If China carries on performing economically in terms of the markets, the same way as in the past year, then I do not think we are likely to be into an extended bear market. Second, even though I said the markets are likely to be more concerned about European growth and the ECB doing less, in fact the very latest inflation data we got out of Germany last week was lower than expected… I do not think in Europe, this is the beginning of a sort of true wholesale concern all over the world. And then third, the tone of what central bank policymakers say about the perception about this speed of tightening is something that market participants will now be watching even more closely than they were before Friday.
ET Now: India post budget investors are slightly disappointed about LTCG and the fiscal plan. Much of the India sell-off is local also. So what do you think could be positioning of India because now it is a double whammy: returns would be lower, valuations are stretched and then you have the global sell-off?
Jim O' Neill: Well, I wish I knew the answer. But I kind of guess I think the first part of it was local. I think the markets perceived your budget to be not showing anything particularly positively new in terms of economic growth or finance on its at the margin because of this policy step of long term capital gains tax but with a negative surprise and then on top of it, the markets spent the last 24 hours worrying about a tighter inflationary environment in the US.
In fact, considering the monetary policy as we discussed, Indian markets have been rallying virtually every day, almost irrelevant of anything that was going on in India or elsewhere. So, it was very vulnerable to this kind of correction and I think now at least for the next few trading days, the international forces will probably take over any focus on domestic factors and so, we get the international market coming down a bit, it would be my guess.
ET Now: So, from an investor's point of view, is this the buy on dips market or is it the more book your profits and stay out for a bit market?
Jim O' Neill: I knew you are going to ask me that question and my easy cheap answer is of course on a personal basis. I do not have to worry about those kinds of things anymore, but my suspicion is that it is a market to take some profits because we have had a very very big run and one of those few things that I learnt in 35 years is nothing ever goes in a straight line. I do not think it is the beginning of a major bear market, but I think it might be a bit choppy for some time.