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Alastair Newton says while the markets focus very closely on politics, the politics itself has not resulted in much market movement, mainly because central banks remain far more important.
Alastair Newton says while the markets focus very closely on politics, the politics itself has not resulted in much market movement, mainly because central banks remain far more important.

PM Narendra Modi sees his reform agenda as a two-term project: Alastair Newton

The senior political analyst at Nomura on why the BJP-led government should not be judged on the basis of its performance in its first year

Indian Prime Minister Narendra Modi sees his reform agenda as a two-term project and his Bharatiya Janata Party (BJP)-led government should not be judged on the basis of its performance in its first year, Alastair Newton, managing director of global markets research and senior political analyst at Nomura International Plc., said in a media interaction. Edited excerpts:

As a political analyst, what is your take on the Modi government so far?

India was a rare example last year where politics had a significant impact on market sentiments and valuations. The turning point in market sentiment in India predates the election cycle, and effectively began in the autumn of 2013, with five major regional elections. The man who turned sentiments on India, is for me, the world’s best central banker—Raghuram Rajan—because it was his actions in August-September 2013 that effectively turned around market sentiments on the rupee and BSE Ltd. Dr Rajan, in my view, has continued to pull rabbits out of hats with two inter-meetings (rate) cuts that we have seen this year. He also succeeded in getting political pressure off his back from Delhi, which I think is very important. Let us not forget RBI (Reserve Bank of India) is an important constituent in the way markets are looking at India today. I share generally positive sentiments about India. I guess expectations that Modi would come in and sweep all problems away were ludicrous, and I am actually quite pleased that what we’ve seen of reforms in India has been a measured approach, because building a consensus to reform in India is never easy. Modi has done a pretty good job so far—first, getting India’s bureaucracy on track to a large extent and, secondly, beginning to build up more regional support for reforms such as introducing GST (goods and services tax), which, finance minister (Arun) Jaitley intimated, will be taken up in the upcoming session of Parliament and, thirdly, trying to build a consensus in the upper House. What people forgot at the time of the elections is that it is all very well to have a big majority in Lok Sabha, but actually rules require support in both Houses. I think BJP made a mistake in assuming that after passing legislation in the lower House, if it gets rejected in the upper House, then a joint session can be called to pass it. For that to happen, the upper House has to first vote to reject; the upper House is refusing to vote, slowing the speed at which the government can undertake reforms. Particularly with the boost that India has been given through the fall in oil prices, I think that it is realistic that India’s growth uptake will be 2-3% more from what it was in the past few years. We do need to keep in mind that Modi himself sees his reform agenda as a two-term project.

Has India rekindled investors fears with retrospective tax demands. On this issue, there appears to be no difference between the last government and the current one.

There is no difference yet. Again, I would urge you not to judge the Modi government on its achievements in the first year, let alone first six months. Headline-grabbing retrospective tax bills that are being served on western companies is a big disincentive to investments in India. On the other hand, Modi should not be criticized for spending a good deal of his first five months as Prime Minister travelling around potential investor countries, to talk to them about what they were looking for in terms of improving the investment climate in India, what would attract more investments from these countries, and what would get more companies from these countries, especially in the case of Japan, to come to India. I would like to emphasize that Margaret Thatcher did not change the UK in one year or one term—most of the really difficult reforms she did during her second term in office—and I do think we need to be patient with Modi’s efforts to push through reforms in a system that is even more challenging than the UK during Thatcher’s time.

So, what are the risks for India?

Pakistan is not stable and, I am afraid, there is a real risk of a terrorist attack in India emanating from Pakistan again. In the event of that happening—I hope it does not—it would be very difficult for a BJP government to react quite as measuredly as we saw...the Manmohan Singh government do after the tragic events (Mumbai terrorist attacks) in 2008. I want to point to an issue that is long-term—while there is an understandable focus on maritime borders in South-East Asia, and because of that focus particularly in the last year-and-a-half or so, there has been a tendency to forget that China still has one disputed land border, and that is with India. In 1996, China and India signed an accord where they agreed to resolve the land border (issue), and so far, it remains unresolved and, as most Indians know, there are fairly frequent incursions across the line of control by the PLA (People’s Liberation Army), including when Chinese President Xi Jinping was on a state visit to India last year.

In 2011, a famous Scandinavian sociologist published a study of the correlation between gender imbalances in society—excessive number of males with respect to females—and violence within and between societies. 121 young men to every 100 women in China today and 112 young men to every 100 young women in India—that in itself is worrying. Add to that the fact that India and China between them have 40% of the world’s population and something less than 10% of the world’s water, and then consider that disputed border is on top of the world’s most significant water resource, and you have to say that in the medium-term, that poses a significant risk to regional security and, therefore, India’s growth. I would dearly love to see Modi and Xi sit down and resolve that border dispute once and for all because that removes a potential disincentive to investment in India even today.

What is your global outlook for markets? What are the political risks and how would that impact markets across the world?

It would be fair to say that while markets focus very closely on politics, the politics itself has not resulted in much market movement, mainly because central banks remain far more important to the markets than central governments. The big question is when and how many times will the Fed raise rates this year. This is a significantly important question not just for the US, but also what impact it will have on the sentiment over emerging markets—especially for corporate dollar denominated debt in Asia, and what it might imply for Asian stock markets once the Fed starts raising rates.

We also have to consider what is happening in the monetary condition in China—we can reasonably assume that the PBOC (People’s Bank of China) is going to continue with easing monetary policy for at least the majority of this year, but how much of that, I wonder, is going to be offset by the continuing crackdown on the shadow banking sector, which is basically draining credit out of the system. That is a seriously large unknown—it will impact supply chain as well as commodity prices across Asia. We can reasonably assume the European Central Bank will continue to stick to its course that was predetermined in January and February, but there is plenty of scope for turbulence in the euro zone, including a possible Grexit (the exit of Greece from the monetary union). As for Japan, my personal view is that for political reasons, we could see a stimulus as early as this month or in May, bearing in mind that (Prime Minister) Shinzo Abe has to stand for re-election as leader of his party in September. Although there is no threat to Abe being re-elected, he may want some better numbers to support his campaign. Additionally, we have seen various central banks across the world reduce rates...We should expect more surprises from central banks...

I am concerned about resurgent nationalism—worldwide, we are seeing nationalism uptick quite dramatically. Here is Asia, its three largest economies—China, Japan and India—are all governed by openly and proudly nationalist leaders. We are likely to see continued friction around borders and more widely around nationalism here. In the Middle East, Islamic State—although not strictly nationalist, as they have a religious foundation—but by looking to set up a caliphate and by the way it is going about it, they are betraying many characteristics that we normally associate with nationalism. Moving northwards, Vladimir Putin is leading a regime that is now founded principally on nationalism and anti-western sentiment, and that will continue to cause significant problems for NATO members. In Europe, nationalism is manifesting itself in small parties who are having a significant impact in elections across the continent—Greece, Spain and France. In Finland, we have a general election coming up where the Finns Party that is nationalistic and anti-EU is expected to do well, and this could have a profound impact on Europe’s ability to have a new agreement with the Greeks.

The main subjects are what is going to happen over oil, and will we see a geopolitical shock on the supply side? Will we see a Grexit, and will the euro zone break up? Our forecast, with which I agree, is that it will not, but my personal view is we are close to an accidental Grexit than we have been at any time in the past. In Russia, what will Putin do next to distract from increasingly social economic unrest at home—initially, through sanctions, but made much worse by the fall in the price of oil. In the UK, will we see another hung Parliament—if so, what will that imply for governance in the UK and why are the markets not factoring in electoral risks at this stage? Then, of course, a lot of regional risks in Asia—how do we see Joko Widodo’s progress in Indonesia? In Thailand, the military is about to amend the constitution and put former prime minister Yingluck Shinawatra on trial, and will that lead to renewed serious civil unrest? In Malaysia, Prime Minister Najib Razak is rumoured to be under threat from his own party. In China, what sort of reform is President Xi Jinping doing—where is he taking China, and will we see protests back on the streets of Hong Kong? All these issues that have a serious bearing on markets...

What about commodity prices for 2015?

The second in my overarching themes for 2015 is lower commodity prices—not just oil, although the main focus is oil. All conspiracy theories are wrong—the Saudis are not doing this to beat up Russia or Iran, but to protect their market share, and there is only a very small probability of a change in Saudi policy in the foreseeable future. In the run-up, between now and the next Opec (Organization of Petroleum Exporting Countries) meeting in June, the price of oil may soften further. Storage capacity has nearly been exhausted and, historically, every year, around Q2, the demand for oil goes down.

Why are the Saudis bent on retaining market share? The main reason is they seem to have concluded they are now within visible policy rangemaybe 20-30 years—of the end of the oil age, and they may be left with a large liquid asset in the ground, which no one wants to buy. At the end of this year, at the COP21 Paris climate talks, where 196 countries will gather to try to agree to a binding treaty on emissions reduction, there is now a reasonable possibility that we may succeed in coming up with an agreement that will address climate change significantly over a period of time through a long-term shift away from oil to gas. Saudis have oil, but are poor in gas.

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