Mumbai: The economic fallout of the financial crisis is yet to play out, even if equity markets are touching new highs and rapid growth is predicted, Vetri Subramaniam, head of equity funds at Religare Asset Management Co. Pvt. Ltd, said in an interview. Edited excerpts:
Graphic: Ahmed Raza Khan / Mint
Even a year ago, there was talk of a Great Depression and Japanese style stagnation. Now people are optimistic and even the International Monetary Fund has predicted a 4.3% expansion. What has changed?
There is a significant timing mismatch in that statement. The end game of the financial crisis of 2008 and its economic fallout on the US economy has not yet played out and is in the realm of the unknown. What we do, however, know is that unprecedented monetary action, which was globally coordinated, and the accompanying fiscal stimulus (packages) have stabilized the financial system and the world economy. Fiscal deficits and debt-to-GDP (gross domestic product) ratios have climbed around the world.
I think the best analysis of the situation facing the US, the country at the centre of the debate (with its implication on the rest of the world), is presented in Kenneth Rogoff’s book This Time is Different: Eight Centuries of Financial Folly. Once debt becomes excessive, countries do not grow their way out of the problem. They must go through the time-consuming and often painful processes of debt repayment and increased saving.
The last couple of weeks markets around the world touched 18-month or 24-month highs. Are investors getting complacent or is it more to do with improving fundamentals?
There has been an improvement in economic data points across the world, particularly in the BRIC (Brazil, Russia, India and China) and other emerging economies that do not suffer from the problems currently confronting the developed world. Monetary policy remains extremely easy in the developed world and the emerging economies are trying to normalize interest rates, but this will happen in gradual fashion as nobody wants to risk choking the recovery.
In summary, we have an environment that is conducive for stocks, and equity markets have rallied to new highs. I think investors will have to now look beyond the recovery and focus more on the sustainability of the trend and valuations.
Have US Federal Reserve chairman Ben Bernanke and other central bankers bailed out the world financial system? How can a crisis that started with a debt overload be resolved with governments piling on more debt?
There is no crisis for which the current Fed chairman was better prepared than for the financial crisis of 2008. The Great Depression of 1929 has been the focus of much of his research and he has publicly professed that it was the Fed’s actions to reduce money supply that was the cause of the Great Depression. Once you know that you can see his logic in flooding the system with as much liquidity as it takes to prevent a repeat of 1929.
But the issue remains that you cannot solve a problem of indebtedness by taking on more debt. You can only work down your indebtedness by saving more, consuming less, selling assets to settle your liabilities or by inflation, which causes the value of your liabilities to fall. You can postpone the bitter pill, but it cannot be avoided.
How do you compare this recovery with the one that happened in 2004? Is it happening too fast?
The fundamentals are much weaker than they were in 2004. This is particularly true for the developed world. The emerging economies in many cases actually have better fundamentals than they had in 2004. However, their issues are different; they need to adopt more domestic driven policies rather than rely on mercantilist policies of yore. In that context, except for our fiscal policies, India remains remarkably well placed and there has not been a better time to be Indian.