The Indian markets will continue to do well going forward only if the dollar loses its strength and crude oil prices cool off significantly, said Krishna Memani, chief investment officer, Oppenheimer Funds. New York-based Memani tells Sanam Mirchandani in an interview that the scenario for increasing exposure into India is not good for Oppenheimer as the macro situation is deteriorating and valuations are not attractive.
With oil prices hovering around $80 per barrel, do you see Indian markets giving up recent gains?
India has really improving micro drivers, while the macros, if the current situation persists, can deteriorate quite rapidly. So, internal growth at the moment is pretty good. Earnings are looking quite good, but macro pressures are building with strong dollar and high oil prices. For the Indian market to maintain its strength, the expectation has to be that the dollar strength and oil price surge is temporary. If that is not the case, Indian markets all of a sudden become very vulnerable or more vulnerable than many other emerging markets (EMs). The worst situation for India in particular and emerging markets in general would be a substantial strength of the dollar, which kind of effectively tells you that growth in emerging markets is slowing down meaningfully.
How does India stand in your preference list within EMs?
We have always liked India from a long-term standpoint. The macro environment, the valuation challenges and more attractive opportunities in other places doesnt make India very attractive at the moment. India remains a good solid long-term story and there are really good things happening in India at company-specific level. At the macro level, at the moment, I am not so sure. Our investment philosophy for India and the rest of the world is really more company driven. Valuations are not that attractive in India. The macro environment at least at the moment is deteriorating. Thats not a good scenario for us to be increasing our exposure.
What are global investors pricing in on the political front in India in the run-up to the general elections in 2019?
The political situation is getting muddier. Demonetisation, GST, bank scandals and all of that have clearly made a dent into the standing of the BJP government. From a longer-term perspective, we still believe that BJP could win in 2019, probably with a lesser margin than last time around, but still a winner and it will be an opportunity to continue with its reform programme.
With macro worries increasing, how would you see earnings growth in India going ahead?
Indian earnings have been somewhat weak. However, I see the longer-term picture improving. Forward earnings in India are significantly better and the outlook for 2019 from all the guidance we have seen is quite good. It is very contingent on the macro environment. All of that can deteriorate quite rapidly if oil prices spike or dollar maintains its strength for a prolonged period of time.
Which are the areas of investment that interest you in India and which would you avoid?
We believe certain banks are wellpositioned for an economy that is getting more financialised and that is the longer-term play. On the IT front, it is a combination of management teams that are executing very well and growth overseas, in developed markets, and a weak currency certainly helps those types of exporters. In the current environment, what you have to avoid are companies which have high exposure to inflationary pressures because that is increasing on a global basis and consumptiondriven companies primarily because if oil prices persist at a higher level, GDP growth and consumption growth can actually deteriorate quite rapidly.
Which are the most attractive markets currently?
From a valuation standpoint, the European equity markets probably have the best valuation. We still like emerging markets a great deal because we think growth in emerging markets is more sustainable at this point in the cycle and the growth in emerging markets is becoming less China-dependent. Our expectation is that dollar strength fades and oil prices normalise as well. However, that remains to be seen.
How do you expect the rate hike cycle by the US Federal Reserve to pan out in the rest of the year?
Our expectation is that the Fed tightens two more times in 2018 and thrice in 2019. There is a market narrative that they may tighten more aggressively in 2018. We dont think that is going to be the case but to some extent this is uncharted territory for the Fed primarily because while they have some expectations, there is some uncertainty as to how things will play out with respect to the stimulus. For now, I dont think there is any reason to change the view.
What are the key triggers for global markets going ahead?
There are three issues facing markets at the moment. First, what the Fed is going to do. Fed is one of the largest central banks and the only central bank that is on the tightening path. Second, what is going to happen on the trade war front and third, what is going to happen on the inflation front. As far as the Fed is concerned, we are expecting three tightening this year. Most of that is priced in. If 10-year treasury rates go meaningfully higher than 3%, that is going to be a matter of concern for the global markets, especially the US equity markets. On the trade war front, while there is going to be a great deal of posturing.
The likelihood that anything meaningful happens on that front is pretty small. As far as inflation is concerned, that is the real uncertainty in the market. US policy makers dumped a lot of stimulus in an economy that is already close to full employment. Therefore, inflationary pressures in the US are going to pick up. The question really is, would the Fed let those inflationary pressures play out or react aggressively. My expectation is the Fed lets the economy run a little harder knowing full well that these are temporary things and the inflationary pressures would be fading off by 2019 as the stimulus plays through, and therefore not tighten aggressively. But that remains to be seen.