BackPrefer China among emerging markets: Jim O’Neill
O'Neill says while the Modi govt's performance has been good, it has not lived up to his high expectations
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Mumbai: Jim O’Neill, former chairman of Goldman Sachs Asset Management Co. Ltd and the man who coined the term BRIC (Brazil Russia, India, China), prefers China to India among emerging markets. He would rate Indian equities as neutral at this point of time. Indian equity markets have underperformed Chinese markets by a wide margin in 2015. While China’s Shanghai Composite has risen 37% so far this year, the Sensex has fallen 1.7%. In a phone interview from the UK, O’Neill said the while the Narendra Modi government’s performance has been good, it has not lived up to his high expectations. Edited excerpts:
The Indian markets have fallen in recent weeks. How do you view them after the correction?
They are getting more interesting. I personally sold an investment I have in an Indian fund about three weeks ago because it seemed to me that after the Indian budget, there was kind of no good story left.
Why do you think there is no good story left?
I think so because though there was nothing wrong with the budget, there was nothing particularly eye-catching about it either. There was no wow factor. There were a number of important things suggested but it takes time for a lot of those things to be implemented.
For example, if we get details on how the monetary policy council will include external voting members, that would be very positive. They announced that, but there were no details.
So, at some point, India will become very attractive again. Everybody has become more optimistic, and now we need true evidence that India is clearly accelerating which I think will probably come, but haven’t got the evidence.
If you were to give a rating to Indian equities, what would it be?
I would be neutral.
The government will complete a year in power next month. How do you view its performance? Have it met your expectations or fallen short?
It has been very good, but I had very high expectations.
What have been the key positives and negatives?
The key positive is that Modi has followed on through on the commitment of maximum governance and minimum government. I am very impressed by that. On the negative side, India is a complex difficult place. So, to get things done is difficult for anybody, including Modi.
What do you expect from the Indian government in the next one year?
I’d like to see some of the more ambitious challenges tackled more directly. On monetary policy, I’d like to see a true BoE (Bank of England) style monetary policy council, where there are external voting members. I’d like to also see bolder plans about education and healthcare.
In terms of investing in emerging market equities, what is your preference list?
At the moment, my number one choice remains China. Then, comes India, Russia and Brazil.
I think there are primarily two reasons going for China. First of all, China, and this is emphasized by policymakers yesterday entering a period of significant economic stimulus both in terms of monetary and fiscal policy.
For China, first of all, and this is emphasized by policymakers yesterday entering of a period of significant economic stimulus both in terms of monetary and fiscal policy.
These are usually very good for momentum of equity markets. Secondly, I think what I call the new China, which is better reflected by the Shenzhen — is adjusting its underlying economy quite substantially. The new China is more dependent on the consumer and less dependent on the more value-added manufacturing.
What are the risk involved with Chinese market, considering that it has rallied a lot?
Obviously, there is a risk of correction, given it has seen such a powerful rally. Another risk is some of the slowdown in the industrial sector may be worse than I think.
As you mentioned the industrial growth in China is slowing down. The growth engine in China is not as vibrant as before . Does that become a big risk?
It doesn’t bother me. I don’t really agree with that. I am not surprised that China is slowing down. In fact, China is the one of the four BRIC countries, which has so far this decade has actually positively outperformed the growth expectations I have. China has slowed, but I knew it was going to slow down. At $10 trillion, China growing by 7% is equivalent to Japan growing by 14%.
Currently, there is an ongoing row about the minimum requirement tax (MAT) between the FIIs (foreign institutional investors ) and the Indian government? What are your views on this?
Its not something that I am following too closely. I ‘d call it a passing phase.
Corporate earnings in India have been very disappointing? What are your views on the same and when do you see recovery coming in?
I can relate it to the macro economy. It will be a key challenge for the next three months. I hope and assume we will start seeing recovery in the second half of this year.
Where do you see India’s economic growth vs its emerging market peers?
I think India still has a reasonable chance of growing by 8% or more in the next 2-3 years, which would be stronger than China.
What is your take on Indian rupee?
I am actually neutral about the rupee as well.
Where do see interest rates in India ? How much of more cuts do you expect in this calendar year?
I think it obviously depends how inflation performs but now that oil prices have recovered, it makes it a little more complex. but it depends on oil prices and the rupee really. I think there may be at least two more 25 basis points cuts.
When do you expect US Federal Reserve to hike interest rates? Will it impact
I personally believe June is off the table. September is still a possibility, but if we don't see stronger employment growth next month, then we won’t have a rate hike this year..
If US does hike interest rates, do you think emerging markets could be under pressure, with the funds flowing out?
It depends when. If the hike happens in June, yes, it will be negative. If they don’t, no. If it is September, there is nothing to worry about at least now.
What is your take on US dollar?
I have been fairly negative for the past month, and I remain so.
Do you miss your time at Goldman Sachs?
Not at all! I am immersed in my role in chairing the review on antri-microbial resistance. My task is to find a global solution, and it is extremely demanding and very enjoyable.
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