On Thank God It’s Friday this week, we spoke to Richard Harris, chief executive officer, of Portshelter Investment Management on the big global factors that emerging markets like India are watching out for, namely a rate hike by the U.S. Federal Reserve, and the U.S. Presidential elections in November.
India, he said, is among the most attractive in emerging market basket, but warned that there are no real catalysts for the market to attract more investments going forward.
Here are edited excerpts from that conversation.
Hillary Clinton right now is leading the polls in the U.S. Presidential elections. Should she be elected as the U.S. President, What can you tell us about her economic policies? Will we see a continuation of what Barack Obama has left us with?
Well I am not too sure we have seen much of Hillarynomics yet. But I think probably there will be some departures from Obama because Obama has really been a lame duck for the last year or so. In some areas, the public has moved away from what Obama has tried to do. Hillary will add her own flavour to it.
If you look at Hillarynomics is all about, she sounds like a socialist but I suspect that her heart lies in foreign policy. Her time as Secretary of State was successful, that’s an interesting sign. It’s a lot easier to be a success on the world stage than to be at home. I think she might turn out to be a strong President in terms of how the world sees America. We are yet to see how much success she is likely to have, if she goes with her most socialist policies.
In the outside chance that Trump is elected, will that be a matter of concern?
Wall Street is betting on a Hillary victory at the moment. So I do think it would be a concern. They see Trump as being all talk. Trump talks about building a wall separating Mexico, tearing up trade deals that have taken decades to put together, as opposed to negotiating properly. All this is likely to spook the markets. A Trump victory will be quite a disaster for the stock markets.
Also another important event we are looking at is the potential rate hike by the U.S. Federal Reserve. Can the Fed really hike rates right now? At the start of 2016 we were staring at four rate hikes to come in a year, we have not seen even one come through. So assuming one hike does come in December, what happens to the other three or the lack of it? What does that really indicate to you about the state of the U.S. economy?
The Fed has really lost its battle, it has lost credibility. Yes, they were supposed to do four rate hikes this year. That’ll be one percent above where we are now. it probably would have slowed the economy a little bit. Whether it would have made a big impact is quite uncertain because most people can take an extra one percent in terms of interest rates. All we have now is a situation where interest rates are far too low. They still have to worry about increasing the rates, they don’t have the inbuilt discounting that the market had been talking about, for rate hikes. So I see the 25 basis point hike in December as a waste of time. it won’t do anything for the market, the market will run right through it. What it does is reveals that the Fed lost a lot of credibility in the last 12 months. You have to put that at the door of Janet Yellen. She showed no leadership. It’s unlikely she will lead under a Hillary presidency. It’s probably time that we had another Fed chair.
Richard how are you reading the U.S. economy right now?
Well, I will always say and I have said for the last 2-3 years, maybe 4 years, that the U.S. economy is doing fine. 1.5-2 percent growth is probably where it should be. We can’t expect 6 percent as China claims to have. So in this market with weak commodities, with issues around the world, with a sluggish euro, one, 1-1.5 percent in Europe is not too bad. 1.5-2 percent in the U.S.. The same in the U.K. - at least so it was in the U.K. before Brexit - is actually not too bad either. You have to figure out this is where we are, this is the new norm, and to expect anything else is just to put yourself in a situation where you can just get disappointment, after disappointment, after disappointment.
So I want to shift focus to China then. We have seen GDP growth in China in third quarter at around 6.7 percent but we have also seen a drop in its exports for the month of September? How are you reading it and how are investors seeing China as an investment destination?
Well you have to discredit the fact that China is growing at 6.7 percent. You know it is probably a couple of percent below that. Ironically, we probably did have a rise in quarterly growth in the third quarter. It is just now that we can’t see the figures, as the GDP figures are fictitious. However, you do see a lot in other figures. Clearly we have exports lower, that was a bit of a worry. But we clearly have a buoyant real estate market in China, the risk factor around a lot of money in China, the degree of reforms needed are intense and President Xi Jinping is probably the right man to bring in those reforms to cut through the vested interest and cut through the traditional mechanisms in the state that we have at the moment. But he’s going to have his work cut out, it’s going to be difficult. I think that we are going to see more incremental moves in China reform than any big moves.
Where does India stand in the emerging market basket, especially in the backdrop of the global growth slowdown, foreign fund flows and the liquidity flush driven by asset purchases by global central banks.
We have seen a slowdown in global trade. I am not sure its necessarily seen a slowdown in global growth. Of course if you look at an index you see the global growth has slowed but that’s because you got big economies like China which are slowing, maybe even India. They are quite big economies so that will have an impact. But I think overall economies have not necessarily slowed down but they just have grown very fast. What we are looking at in the future is that period where the growth is likely to stay where it is and we are going to have a status quo. As a lot of concerns we have had like Brexit, slowing Europe and Greece fall out of the system, I think the picture could start looking a lot better.
What do you think can work in favour of India or what needs to change for it to become a preferred emerging market?
I have been quite positive on India ever since we had the taper tantrums, when money was moving to the emerging markets. I think the advantage that India has is that it is quite stable. It was benefitted from the fall in oil prices. and that are the global macroeconomic effects that are very important. We are seeing an element of return from outsourcing and of course that might slowdown faster than the economic growth in India. But India’s growth is very much down to domestic politics and how far it is seeing reforms going in the right direction. In terms of the rigidities built into the economies are always a concern for foreign investors and any sign they may be eased or removed, as in the very early days of the Modi administration, are positive signs. Apart from that, there are no real catalysts you can see for foreigners to move into India apart from the fact that it is one of the best emerging markets.
On that note, which is the next Indian stock you are looking to buy?
I can’t really talk on stocks but I tend to look at things very simplistically. I tend to say when it’s a risk-on market, then that you want to go more aggressive on cyclicals. When it’s risk-off, you sort of retreat. And on a global basis, when it’s risk-on, you do look at equities, maybe commodities. When it’s risk-off, then you’re back into looking at the dollar, the yen, then prices like gold move. It’s been a fairly predictable pattern for the last 3 or 4 years and as long as you can pretty well figure out which path of the trend you want to be in, I think you can figure out what are the kind of things you want to buy.
Three books that you would like to recommend that have influenced you as a person or investment styles?
The kind of things that I am reading at the moment are behavioural economics kind of books. When you are young, you have to do this – you have to focus on the fundamentals, you have to understand macroeconomics, you have to understand how to value companies and prices. It takes time to build an experience where you develop the nerves to know what’s working and what isn’t and I think some of the behavioural finance texts and you can go as far as things like Robert Schiller, Daniel Kahneman are all good, especially Kahneman in terms of behavioural aspects. And also Nicholas Taleb like Fooled By Randomness and Black Swan all of these talk about things and investments that people don’t learn about in textbooks, and don’t necessarily learn after 10 years in the market. It’s only later on that you realise that the thing that you mustn’t really expect in investment is the unexpected and planning for that is a very important part of investment.