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Business News/ Industry / Banking/  In a world of scarce alternatives, India performs: David Fernandez
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In a world of scarce alternatives, India performs: David Fernandez

The chief economist of Asia-Pacific at Barclays on why he is encouraging clients to continue to overweight their allocations to India

At this point, says Fernandez, the central scenario is that while politics is about alternatives, it does not seem likely that things will slow, and that the opposition is not in a position to do more than obstruct, and certainly not change the agenda. Premium
At this point, says Fernandez, the central scenario is that while politics is about alternatives, it does not seem likely that things will slow, and that the opposition is not in a position to do more than obstruct, and certainly not change the agenda.

Singapore: The agenda of the Narendra Modi government still holds a lot of promise, and while it may be too early to say if the administration is on course with its reforms agenda, investors can take medium-term comfort from a policy point of view, David Fernandez, managing director, head of fixed income, currencies and commodities (FICC) research and chief economist, Asia Pacific, Barclays Plc., said in an interview. That’s reflected by the increased weightage overseas investors are now giving the country in their global portfolios, he said.

Edited excerpts:

Most economists maintain that India continues to be a bright spot. Looking at India from outside, do you share the same opinion?

We’ve been happy to encourage our clients to continue to overweight their allocations to India... It is not slam-dunk positive, but something around 3-5% positive returns this year, which is quite an impressive number in this environment. Investors have been rewarded. Entering into 2016, we are likely to say the same things on India as we said this year. Why? Lower commodity prices—there is no country in the world that has been a bigger beneficiary across a wide range of macrovariables from a lower energy bill.

Be it inflation, balance of payments, fiscal, India has clearly been a huge beneficiary...it is still too early to judge if this government has gone fast enough. A lot of people are impatient, and they should be. But on the other hand, the agenda of this government still holds a lot of promise. It is, therefore, too early to say if they are not on track. Investors have a medium-term comfort from a policy point of view.

Added to that, you have a lack of communication and clarity in Chinese policy, and you have an RBI (Reserve Bank of India) governor who could not be more qualified in terms of bringing confidence to the markets and in communicating. It is a wonderful combination... Over the years, India had made it quite difficult for foreigners to access the markets and, particularly, fixed-income markets.

The direction the Indian regulators have taken is a positive and proactive one. The biggest news out of the last RBI meeting was not just on rates, but the announcement of further liberalization for foreigner access… For clients, who have historically had very low ratings and exposure to India, in fixed income, the ability to access that market is music to their ears.

So you have a good fundamental story, and from being difficult and challenging, access for foreigners is being made easier. The risk is still there in the kind of global environment that we are in—we could have more rate cuts in India if inflation remains relatively tame.

I don’t have too much negative on India at this point, and, yes, there are many areas where they could have done better. There could be near-term volatility due to the just concluded state elections (in Bihar). But big picture, when compared with the much more challenging stories we have in other parts of the world, we will keep India very high on our list.

Now India is able to capitalize on the fact that private investors have not been able, over the years, to gain anything close to the correct weighting of their global portfolio in India. Fundamentals are attractive now, access has improved, and everyone is coming in.

You say it is too early to judge the current government, but it has been around for 18 months. What are your clients saying to you on the pace of reforms? How will Bihar (elections) impact the reform process—we have other state elections also coming up, and do you think setbacks for the BJP can derail reforms? (The interview was done prior to the declaration of the Bihar election results.)

There have been phases in the last 18 months when expectations were sky-high or unrealistic. But I think it goes into the feeling that is coming into the Modi administration that it is high time that something happens—so it is understandable on hindsight that expectations had gone so high.

Yes, clients certainly have been disappointed by the inability of the Modi government to get things through, the obvious one being the GST (goods and services tax) reform. With this important state elections (Bihar), and other state elections coming up, everyone will have to gauge what that means in terms of risks for the longevity of the administration.

At this point, the central scenario is that while politics is about alternatives, it does not seem likely that things will slow, and that the opposition is not in a position to do more than obstruct, and certainly not change the agenda.

I think most investors, while they are, may be, disappointed that things did not happen earlier, they are still willing to give this government time—it is so important that the macro backdrop on a relative basis be strong in India.

The fact that our forecast and several other forecasts say that growth will be even stronger in the next fiscal, the fact that inflation is likely to stay in the low-five handles, even in the next financial year, the fact that RBI has already cut rates, and the fact that there is scope for more cuts in this environment, and the current account which is a standard thing when people look at vulnerable emerging markets—these are all very powerful signals to investors.

Again, you can retreat, but will you not hold anything? That is also a choice some clients are making; but in that world of scarce alternatives, where you can have a solid investment thesis, India performs. The proof is there—the past year, even if you feel disappointed in the progress made—you still had positive returns from India.

Recently, we’ve had a scenario where central bank governor Raghuram Rajan has waded into the debate over the rising intolerance in India. We’ve had some big corporate leaders in India, too, voicing their concerns. Even as Modi goes all out to woo investors, we’ve seen the issue attract global attention after Moody’s Analytics, in a report, asked Prime Minister Modi to keep his party members “in check". What message does all this convey to investors abroad? Is India confronted with an image/perception problem?

This is not an issue I am aware of—I am not aware of global investors saying this issue has been on their radar. Global investors are looking at what we discussed before—the fundamental picture—macro, current account, inflation and all the rest. The only thing I would say on this is that it is a packaged deal for all political leaders.

We can go down the list in our neighbourhood—be it (Japanese) Prime Minister Shinzo Abe, or Chinese President Xi Jinping, all are in a lot of ways, pro-market and are economic and financial liberals, but they all have other sides.

It can be on security, on nationalism—that is part of the appeal that has put them in power. It is an interesting phase in Asia, and you can then begin to ask the deeper questions—is it sustainable, and if the political process does not evolve, can the economics and market side evolve? In India, the tension between being liberal on markets and financial issues, and being more conservative on other issues, is less of a problem in the near term.

If there is an issue, this question can be asked more on the China side, because of the way they are needing to transform their growth in a way that a lot of people say is not consistent with the type of government that they currently have.

How do you see China?

When it comes to China, for me, I’ve been out in the region since the 1997-98 crisis, and for a very long time, people have been lazy in the way they have looked at the Chinese economy. Everything seemed to be going well. We were not sure what the numbers were, but they seemed to be going strong. When it came to financial risks, the linkages between China and the rest of the world were only developing on the real side—over the 18 years I’ve been in the region, things have obviously changed on the real side.

Understanding risks is central to having transparency, and on that score, the world had lagged in building up its knowledge about what is happening in China at very basic levels, political, decision-making and what their economic goals are… China has also lagged in its ability to communicate to the rest of the world what it is trying to do, and that creates a supply-demand imbalance that is unlikely to be corrected anytime soon.

If you are worried about it now, as many people are, you will be very worried about China for a very long time. The current leadership is determined to take the country, the party and the economy in a new direction. In China, it is seven plus years left for this leader, and he is thinking in that time scope. So, get used to the new normal in terms of growth. As we enter into 2016, where China will chair the G-20, it will be taking a more prominent role in global financial decision-making, and it will be China that will, in a lot of ways, be setting the global agenda; this is a situation we have not been in before.

While volatility has been generated out of China in recent quarters, it has been a calm couple of months, but I don’t think that will last as we get into next year—but it is hard to call a timing. If China continues in the basic direction that is being set by its current leadership—rebalancing of growth, liberalization of financial markets, including capital account opening—then, reverberations globally will continue to be felt, and volatility will remain a key risk.

While Fed is embarking on tightening cycle, India, China, Australia and the euro zone are on a monetary easing cycle; will that ensure ample liquidity in the system?

Yes, this divergence has been there for a long time, and the flexibility to ease more is a virtue that emerging markets still have, and developed markets don’t.

There are many creative ways to ease, but in the case of an India, or Australia, it is cutting rates. We are open-minded to easing more.

Growth in both places—India and Australia—could be better or worse, but the fact is that inflation continues to surprise on the downside, gives the monetary authorities the space to try and spur growth.

But when you have a lower-than-expected inflation from a real rate point of view, you clearly have more flexibility—we don’t have it as a baseline that they will use that flexibility.

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Published: 13 Nov 2015, 01:32 AM IST
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