BackIndia is an unfulfilled promise: Barend Janssens
Janssens on his outlook for India, the BRIC economies and the structural problems confronting them that their political systems cannot tackle
Premium(Janssens says his firm is advising clients to take a breather and be careful and look at high-yielding bonds that give at least a return on investment.)
With the exception of China, the so-called BRIC (Brazil, Russia, India, China) economies are all confronted by structural problems that their political systems cannot tackle—not with the same alacrity as China at any rate, said Barend Janssens, who oversees Royal Bank of Canada’s (RBC) emerging markets wealth management business. Edited excerpts:
As an emerging markets specialist, what is your take on the BRIC economies—do you still see them as growth drivers. Morgan Stanley had declared the Brazilian real, the Indonesian rupiah, the South African rand, the Indian rupee and the Turkish lira as the “Fragile Five". Most of these countries are confronted by high inflation, weakening growth, large external deficits and a high dependence on fixed income inflows.
We need to realize that the BRIC countries are still very much driving the trends in the subsequent regions—for South Asia, it is India that is driving the trends; and for Latin America, it is Brazil and, therefore, you can’t ignore these countries. There is no doubt they will continue to have extremely large influence in emerging markets, but the fact of life is a lot of BRIC countries are facing issues now, which are actually structural. India is a classic example—we see a bit of deadlock on the political side; there are issues on infrastructure and longer-term investment side, as large India-based conglomerates are moving their manufacturing base outside India. If there is long-term lack of investment in education, which is the case in India, you then run into issues as you build up your economy. Therefore, if you look at BRICS as a whole, including South Africa, then China is the exception—it is investing in its infrastructure, education and it is carrying out reforms quite aggressively because of the ability to do that under their political climate. Can you emulate that in other countries? No. There is a difference between the political systems—there is difference between democracies and capitalized communism that you have in China. The level of corruption is an overriding issue in most of these countries. Slowly, but surely, a number of other countries are also coming up that are becoming more important—Indonesia, for example. The other important thing that we often tend to forget is the emergence of Africa. The spotlight for a lot of longer term sinkers in emerging markets is also to look at Africa—the commodity boom drove the first phase, and the second phase there that is now coming up is being driven by consumer activity.
There are a couple of things that can’t be changed in many BRIC countries and a lot of these have got to do with political will to make that change. Brazil is a classic example—10 years ago, Luiz Inacio Lula da Silva came on the back of promising to clean up the country. It was a good platform to start from. They went through economic growth rapidly, but then “boom"—and the confidence is gone. The commodity boom driven by China was important for all these countries—Russia with oil, Brazil with bauxite and aluminum and Africa for everything you can think of. Yes, they all benefited from China and now that is slowing down. I don’t think it is just structural problems alone, but there is high level of drive which is necessary to make these countries work, and that is easier if you have centralized party, as against the political system in India.
Why do you think emerging markets, especially those in Asia, are perceived to have no value unless conditions are supportive in developed economies? Now that the Fed has decided against tapering, do you see investors rushing back to Asia? What is your advice to your clients when it comes to emerging markets?
Sure, but there are two factors. The other being that investment opportunities are deemed safe in the Western world again. And the money is flowing there. Let us be honest—if you can make a return without the currency risk in the US, that is where the flow will be. I am quite aligned with what you are saying—we are nowhere near Asia in 1997. The rupee is a classic case—it has weakened considerably, but not to a level where there is panic. So, I personally feel that this is much more of people saying, “I can get the same returns without the currency risk in my own country."
We are in the wealth management industry and we do not see investors return as aggressively to emerging markets; these are large funds, pension funds that are driving this kind of flows. With regard to emerging markets, and what we tell our clients is that if we look at sector-wise, we currently see a very, very difficult field. There is no one specific sector that stands out—we’ve had the IT (information technology) investments, we’ve had commodities and real estate...What we are advising our clients is to take a breather and be careful and look at high-yielding bonds that give our clients at least a return on their money. This is not the time you say, ‘you are silly if you are not investing in the IT sector or something like that because everything is in a state of flux.
What is your outlook on India? Everybody knows the problems the country faces, but what is your view?
I don’t want to fall into the standard remarks such as “solve your corruption, solve your political situation and make it easier for business" and so forth. My take is India is an unfulfilled promise. That is really what it is—there still is promise, but it is very unfulfilled.
Do you think that the Fed’s decision to delay tapering provides a window of opportunity for markets across Asia to raise capital and do deals—be it initial public offerings (IPOs) or bonds? Is this a good investment opportunity in emerging markets?
First, you need to be careful. Always be careful when you are betting on IPO market to pick up very quickly because this also disappears very quickly. We have seen this happen in the past and this is the reality. On an average, people have not lost too much money investing in the early phase of an IPO and that will continue to be an interesting market. It is more about an allocation here—you have to hope that you end up with a good allocation, because if you end up really small, then your investments in IPO will not be great. The other factor is how much stays with the owner—we often see that in IPOs only 10% gets into the float and this continues to be an issue. If the US situation creates more return opportunities, that will influence the IPO market here.
With more millionaires/billionaires now coming from emerging economies, how do you see the demand for wealth management services in these regions, particularly Asia, in the near- and long-term? Do you also see private banking getting a major boost in Asia?
Demand for professional wealth management services is very high in Asia-Pacific, as shown by the high net worth insights survey in the Capgemini-RBC Wealth Management Asia-Pacific Wealth Report, which finds that nearly twice as many regional high net worth individuals indicate that they have complex needs, compared with those in the rest of the world. This may be due to the greater number of entrepreneurs among high net worth individuals in the Asia-Pacific region, compared to other regions where wealthy individuals are more likely to be either managing inherited wealth, or running firms that they do not own. Of course, those with sophisticated needs will more often need to turn to the advice of trained professionals than those with straightforward needs. The wealth management industry will get a major boost in Asia, but only if it strategizes properly—by managing costs, and making sure to offer the products and services that Asian clients need, while also gaining the right scale.
Will the rise in Asian millionaires see traditional wealth management centres—Switzerland, London and New York—being challenged by the rise of Singapore and Hong Kong?
Other wealth management centres still have their opportunities, given the overall rising levels of wealth globally—the six regions that the Capgemini-RBC Wealth Management World Wealth Report follows saw wealth growth ranging from 6.7% to 11.7% in 2012, which was the latest period of review—but with Asia-Pacific forecast to have the strongest growth going forward, its wealth management centres are likely to be more exciting and dynamic than those in other regions.
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