Growth is likely to slowdown globally be it in US, China or elsewhere, said Prabhat Awasthi, Country Head-India at Nomura. in an interview to et now, Awasthi said that while every economy has its own dynamics, there always amount of global synchronicity as far as the growth is concerned. Excerpts:
Ajaya Sharma: We did see a rate hike by the US Fed despite two nudges from the US president Donald Trump. Even the commentary was not as dovish as perhaps the market was making it out to be. How are you looking at the interest rate scenario and how will it be impacting the investing landscape?
Prabhat Awasthi: The investing landscape is very different from what happens eventually because at end of the day, people anticipate rate hikes. If you get more than what you anticipated, it is negative for investments.
What happened in the US this time around was that people were expecting a bit dovish commentary and the commentary did come out as dovish. The market has moved in that direction. Incrementally, if things get worse in terms of rate hikes, it will be negative for the market because markets globally tend to digest news very quickly.
We at Nomura believes that the growth slowdown is something that is going to happen globally be it in the US, China or elsewhere. This is because we have seen a huge amount of stimulus in the past. The monetary policy, which was too loose, is getting tightened now. Fiscally, you are sort of moving into the other direction and that will definitely have some bearing on the growth.
Ajaya Sharma: How do you think emerging markets will cope with the slowdown led by China and the US? Do you also see a prolong pause in rate hike cycle in the US?
Prabhat Awasthi: There is no one simple answer to this. The important point essentially is that when the growth was good, even then emerging markets (EMs)were not performing extremely well. The money was flowing to developed markets rather than EMs. The growth in the US was probably stronger while EMs were struggling. Cheap money was getting over which had in the past fuelled asset prices in emerging markets. That cycle hopefully will come to an end next year. To the extent that, you can decouple a bit from that overall global slowdown.
But it is not possible for all countries to decouple because even as every economy has its own dynamics, there is still some amount of global synchronicity as far as the growth is concerned. If the Fed pauses at some point in time and the dollar stops appreciating it might not be that bad for emerging market asset prices.
Ajaya Sharma: One of the fallouts of this issue has been the selloff in commodity complex. It started with crude and is now spreading to metals globally. Emerging market consumers will get benefited. What is your reading? Do you think it is purely because of slowdown or there was generally oversupply? What is leading to this entire commodity complex melting?
Prabhat Awasthi: First thing it tells you is that you should refrain from forecasting commodity prices because when crude prices were hovering at $85 a barrel level, everybody was saying $100 a barrel level is imminent. But it is now trading at $50. It is hard to forecast commodity prices and the explanation that come through are always 20-20 with hindsight.
The supply-demand scenario does matters. A forward-looking view of how the supply and demand will interact is what essentially matters in terms of the current pricing. The prices of steel, aluminium prices, cooper prices were not very buoyant even in pre-correction period of crude oil. Crude oil separately had a different sort of construct where there was some amount of supply tightness being talked about because of the action of some of the oil producers. By and large, if you look at all commodities put together, demand side has been the main driver of the slowdown.
Ajaya Sharma: You do a lot of international travel and meet company managements and investors. Tell us more about large Asian economies? How are money allocators analysing the landscape? Do you think that there is eagerness because a bulk of their money in the last two-three years has multiplied nicely in developed markets? If they start correcting, are money allocators willing to invest in emerging markets? Are they looking at economies like India closely because even China has underperformed a bit?
Prabhat Awasthi: It has not been an easy ride for anybody because there was a reasonable amount of bullishness in China to start with. If you look at commentary on India, it has been that India is a very expensive market. Yet the domestic market is up year-to-date while several other large markets are down between 15 per cent and 20 per cent. I do not think that investors were expecting underperformace by China.
The genesis might have been the trade friction with US but the data out of China has essentially gotten weaker and weaker. The data in India has not been that bad except the political news. The growth was clearly showing signs of pickup. That has been the main reason. It has been very difficult market to navigate and there are two kinds of camps out there. One of the camps sees that emerging market has value today. The other believes that it does not. There is no easy answer.
Ajaya Sharma: What is your take on the global facing sectors in India be it large commodity players, several of them are in the index; be it the pharma space which after very bad patch seem to have clawed back but the growth estimates have scaled back, IT.
Prabhat Awasthi: I do not think there is one answer to your question because If you look at commodities, they are not that dependent on US growth. They are dependent on Chinese because China has been the biggest driver of commodities. There is a shortage of skilled labour in US even though visas might not be easy, but it leads to offshoring and leads to business for these companies. Clearly midcap and larcap IT companies are benefitting from it. Pharma is a very different dynamic again because it is a very relation driven by what happened to FDA issues. I think the only thing that connects all these is a rupee. One can safely say that the rupee pass through happen only in sectors where there is pricing power. In technology, the rupee pass through is not happening because customers have clearly much more bargaining power. I would say that there is no one answer for all and you have to be very-very stock-specific and sector specific.