Belt Up For A Global ‘Super Cycle’, Says EM Capital Advisors’ Jeetu Panjabi
The world is in the middle of a global supercycle born last quarter, driven by an easy monetary policy of central banks, according to market veteran Jeetu Panjabi.
He defines a supercycle when the nominal GDP growth is 8-10% in dollar terms. According to Panjabi, the ongoing push by central banks will take growth to those levels. “We have had a couple of years of 8-10% growth in 2010-2011, emerging out of the 2008-09 crisis, and our view is that we will have the 8-10% growth rate in the next two years.”
Easy monetary policy can keep running until the consumer comes back, and the central bank-induced debt can keep sitting on the balance sheets of the nations until such consumer behaviour returns, according to Panjabi of EM Capital Advisors. And he rejected the argument that the U.S. Federal Reserve is running out of firepower, saying that $2.5-trillion Fed balance sheet was considered large but it has only doubled since then.
EM Capital Advisors suggests that equity investors should track nominal GDP data. The world, in real terms, has grown 2-3% in the last 20 years, while the nominal global output swung with between -10% and 13% through this period, according to Panjabi.
This variation in nominal growth has huge implications on the GDP, he said. That’s why 2015 felt so bad despite the real global GDP growing 3.3%, while nominal GDP collapsed -5%, Panjabi said.
Panjabi sees central bank-led catalysts translating into a reflationary environment with a tailwind for businesses. Coupled with a weaker dollar, he said, it would help the nominal world output grow 8-10% for the next few years and the World GDP crossing $100 trillion in 2023.
EM Capital expects two concurrent trends:
The global trade equilibrium in favour of Asia and other developing areas would continue, despite the trade war rhetoric. The firm expects Vietnam, Bangladesh and India to be beneficiaries from shifts away from China on the margin. Higher export demand from these countries would lead to capital flows, and Panjabi says this is already underway.
Acceleration on “data” and “services” side enables tier 2 and tier 3 layers of the skilled world to integrate with the developed economy. Economies will high pools of skilled labour will benefit, making India a big beneficiary.
What Investors Can Do
According to Panjabi:
- EM Capital suggests staying long on emerging equities.
- The transmission in liquidity would play out through the classic channels of financial and banking capital flows.
- From a 12- to 18-month horizon, consumer discretionary, non-capex industrials and financials should be a good place to be.
- Emerging markets, especially in Asia, Panjabi said, are well-positioned coupled with deep cyclical industrial economies like Europe as the real world feels the tailwinds in their sails.
- High-quality financials, where the ability to earn a decent return on equity through structural moats while staying competitive in a disruptive business environment, are the other potential bets.
- The cyclical is far more important than the structural from a demand drive perspective.
The government is doing the right thing by offering production-linked incentives to make sure that India gets its fair share of the supply chain shift from China, Panjabi said. While the benefits are glacial, the scheme won’t have an immediate impact and gains will show up with a bit of a lag, he said.
Another crucial aspect is what he calls “geo-neutrality”. “The amount of money my yoga teacher sitting out of Uttarakhand is making via his class is more than the salaries of his family members,” he said, referring to new income streams moving out of metros because of internet access. This redistribution of wealth across tier II, III and IV feed into a broadening of demand, he said.
Joe Biden coming to power in the U.S. could be a risk because of the base assumption that will take taxes up. There is no clear roadmap to navigate through this, he said.
Profit pools for corporates may come down due to higher taxes in the near term, but it won’t impact those with the 24 to 36-month view, he said, adding that any correction would be an opportunity to buy.
Panjabi, however, doesn’t see Covid-19 pose a very high risk, as the world, according to him, is learning to co-exist with the virus. Citing India’s lower mortality rate, he hopes expects the economy to normalise in the medium term.
Watch the full conversation here: