Mumbai: There are no winners in a trade war, and it is a zero-sum game, says Glenwyn P. Baptist, chief executive officer of Pramerica International Investments. In an interview, Baptist said he largely thinks the lines identifying different markets are blurring. Still, he likes India, South Korea and Taiwan in the emerging markets space. He believes India is a long-term growth story with huge potential. Edited excerpts from an interview:

What impact do you see from the global trade war? Are there really any winners in this game?

There is never any winner in a trade war. It tends to be a zero-sum game. I think everyone will be caught up in it.

Our best guess about the global trade war is it is a grand negotiation strategy. We do not know how this negotiation will end but everything we have seen from our new administration is Mr (Donald) Trump starts a negotiation strategy that is quite different from the previous strategies. That throws his contemporaries, adversaries and even his allies off centre. He is essentially trying to change the game.

We are not exactly sure where the game goes. At the end of the day, we don’t think we will end up crashing the world in the process. We don’t think it will be a completely destabilizing process.

How do you see the emerging markets space faring later this year?

We came up with a report called “The end of sovereignty". The grand concept we are coming to realize we should not be thinking about things like emerging markets or frankly even countries any more. They seem to be losing their relevance both from a global as well increasingly from a portfolio perspective.

Having said that, clearly the outcome of trade wars between large economies, and rising interest rates form the world’s largest economy and a strong growth in the US, and changes in tax that resulted in repatriation of US dollars, translating is rising US dollar. This is all generally bad for emerging market economies.

Markets tend to be forward looking. Our view is that while US economy is likely to continue to be strong, and earnings growth strong, may be the market has already discounted it. However, as trade wars unfold, US is still going to be a beneficiary of portfolio flows, and therefore, we think that emerging markets is not a case to emphasize.

That may be true in the near term, but after recent underperformance on EM (emerging market) equities, one may think that it may be time to overweight EMs in the very near term. We think over the next couple of months, one can get that chance.

Which EMs do you like at this point? How is India placed?

I would say that at this stage, it is probably best to look at countries that are not exposed to not being at the front and centre of the trade war, and not being overly exposed to commodity cycle. Looking at these points, I would say India is well-placed, and tend do be an area where investors should continue investing. South Korea could be even better placed, if the North Korea risk is coming down. Taiwan is also relatively well placed, benefiting from the technology cycle which remains unabated.

Do you see domestic investors overtaking foreign investors in terms of dominance in the stock market?

There’s potentially a long way to go, but there is a huge potential. Domestic investors and savers have a long way to go to move from fixed deposits, gold and real estate to stocks, bonds, and mutual funds market. This is a long-term story.

India is a long-term growth story and the potential is huge. I think that the influence of foreign investors would probably be diminished over time.

How do you see the US interest rate cycle shaping up this year and what could be the impact on EMs?

The US Federal Reserve’s view suggests two more rate hikes this year. Their indications seem to suggest three in 2019, and one in 2020. We think that’s probably going too far. Our view is a bit slower. We will probably see two hikes this year, but next year won’t be so tight. I don’t think it is fully discounted, but a lot of it is.

In the near term, it will prompt investors to shy away from EMs and move to US markets.

How fast are frontier markets catching up with EMs?

Most recently, Argentina seems to be going in and out of EM space. Saudi Arabia with (Saudi) Aramco is out there. We have got countries like Vietnam and Kenya which could be potentially (EMs). But, I don’t think looking that way is a good idea. It is all about individual companies in these countries we need to identify and invest.

Are you also looking at ESG (environmental, social and governance)-focused companies closely? Are investors looking at it in a significant manner and is it a popular option?

The answer is yes. It’s a theme that started in Europe. It’s found its way in the US. Over the last two years, there is so much demand for ESG-aware or ESG-constrained portfolios or ESG-only portfolio. These are investors that are large pension funds in the US. It’s a theme that is gaining momentum.

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