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India’s A Defensive Market. That’s Worked In Its Favour, Says Jim O’Neill

The Indian equity market is likely to hold up much better amid the current global sell-off than some of its emerging market peers, according to former Goldman Sachs AMC Chairman Jim O’ Neill.

“India historically is regarded as a defensive market because it is less dependent on global trade than many other emerging markets, particularly in Asia and also elsewhere,” he told BloombergQuint. But some correction in Indian stocks was warranted, he said, as it comes after a “remarkably steady persistent rally”.

Here are edited excerpts from the conversation.

10 percent down on S&P this week. Are we done with the loses or are there sharper cuts to come?

I think until we get the next U.S. employment report and the wage data next month, there is no chance this market will return to where it was like before. The thing that started all of this is the beginning of fears the U.S. wage inflation with overall inflation is finally starting to pick up, meaning that the Fed will have to raise interest rates more than they want to and certainly more than what was priced in. I think it would be very surprising if we completely stabilise again, at least till we get to the beginning of next month.

The other thing interesting is that in the U.K, the Bank of England made it clear that they are now going to be raising interest rates more that they previously thought because of same sorts of evidence in the U.K. as well. The markets have to deal with the reality that finally, after a long time, somewhere around 10 years, the most important western central banks are are having to go into a period of having to think about increasing interest rates at the same time. It’s perfectly logical after seeing such a massive rally in equity markets.

I’m sure the markets knew this was coming...

Markets always live between greed and fear. Everybody knew that one day this would come but as we have seen happening, and perhaps that’s unravelling now, is because of the slow and steady nature of markets, you have so-called low volatility, and people assume that this is the best environment to get the best yields. But we have to go through this periods before a consensus, a dominant new era comes on to the scene. The next thing that happens is people lost to fearing that all is over, and we have a new environment. I think it will take some time for this to settle down.

Obviously, some people will have the view that the past many years of equity rally is purely because of QE and now we have the end of that, so we are entering a major bear market. I do not believe that. If you look at the economic evidence in many parts of the world, the world economy seems to be in a much better structural position then it has been for a long time. But that does mean that we don’t need the same kind of monetary support that we have seen in the past few years. I’m saying all of this but with the ECB in Europe not yet having sent the same kind of message that we are getting from U.S. and U.K.

Do you think that this would have been a kinder cut, keeping inflation and rates in mind, if weren’t for factors such as algorithmic trading or robo trading or the proportion of money that comes through passive investing or ETFs?

It is definitely the case that these kind of developments add to the size and speed of the [market] move. But they were also important contributors to market momentum when we were rising.

I don’t think anyone should begin to go down the crazy path of attributing blame to those things.as to why the markets are going through this phase. The markets are going through this phase because of simple, fundamental, new economic developments. If it weren’t for the beginning of a pick-up in inflation in the U.S., I don’t think people would be raising the issue of ETFs and low volatility funds. They obviously have been a product of this very lengthy period of low volatility, people searching ways of making money. Someone mentioned an ETF for small cap companies the other day, and that’s probably a sign of how far we’ve moved. I thought he was joking. How can you have an ETF for something which requires very careful stock picking, but apparently we do! I imagine there will be some fallout in the sheer numbers of ETFs that people have been rushing to every other month.

How do you think India will be impacted by this volatility given its own macro fundamentals?

What was interesting to see this morning was that China appeared to be hit more than any other markets. Which means there will be a new discussion around the world that does this also add to people’s fears of China. Ironically, it has started to slow down as many people were worried about it for so many years just when people were positively surprised. That’s an issue which is of global importance, but also of importance for many emerging markets.

India itself has had a remarkably steady persistent rally. It seems to taken place despite the fact India wasn’t necessarily having reporting strong positive news. So, India needed to have some kind of correction linked to this as well.

India historically has often been regarded as a defensive market because it is less dependent on global trade than many other emerging markets, particularly in Asia but also elsewhere. I would suspect that India will hold up better than some other markets that linked in to global trade and global commodities, in particular. The idea that India would be resilient against a global trend of this magnitude, however long it carries on, is unlikely to be the case.