As India’s growth dips to 5%, Daniel Needham, global chief investment officer (CIO) of Morningstar, shares his views on markets across the world and India, and the movement of interest rates. He also explains why Morningstar continues to be bullish on Europe and Japan, a call that the company has held on to for a few years and why the US markets are overpriced in relative terms
India’s GDP has dipped to 5%, which is a six-year low. How attractive is the Indian market compared to its global peers?
The GDP number is not the key driver to our investment view. The GDP might be even lower but we might find the market attractive. India is at the lower end of our relative valuations, so it is not as attractive as other emerging market Asian countries. At the same time, it is more attractive than it was in 2017.
With the price falls, the market has gotten more attractive. There are pockets of the market we like, but India is not at the top of our list.
Interest rates have sunk to new lows this year with government bonds in the negative territory in several countries? Will this keep equity markets supported?
There isn’t a strong link between equity markets and interest rates. Often interest rates are low because people’s growth expectations are lower. At present, we think equities, in aggregate, are less attractive. We are slightly overweight on bonds. Because we are not getting paid a lot to own long-term bonds, we prefer short-term bonds or cash investment. In terms of bonds, we like emerging market local currency bonds such as Indian bonds. They are not super attractive in terms of their history but they are comparable to the UK bond market or the US market. Many emerging market currencies are attractive in relation to the US dollar. We don’t find negative long-term bond yields attractive. In Europe and Japan, it is becoming a common feature.
Gold has seen a major rally this year. Is the bear market in the precious metal that has persisted since 2011 over?
Gold and silver are difficult to value. You don’t get paid any interest or coupon on gold. There is a case to be made that when interest rates are low, the opportunity cost of holding gold is low. There is some evidence to suggest that in times of extreme inflationary and deflationary risks, gold has done relatively well. In an environment when interest rates are low, you can argue that having some gold in the portfolio is sensible.
The 2019 Indian budget was widely criticized due to the new taxes it brought in, although some were subsequently rolled back. How do you see the business climate in India relative to other emerging markets?
The big opportunity for India is improving productivity. Ease of doing business is a key driver of productivity. (Prime Minister Narendra) Modi has been very focused to reduce bureaucracy and speed things up. When I think of the long-term potential, India certainly stands out as one of the most attractive. You have a young population and a huge amount of productivity upside.
In a 2017 interview, you said you were bullish on European and Japanese equities. How has that panned out? Are you still bullish on the markets?
European equities continued to perform well into 2018. We reduced our exposure a bit after the rally. Since then, European stocks have been down a lot on a relative basis. We’ve actually been increasing our exposure. Specifically in Europe, telecom stocks have become more attractive. A lot of our exposure to Europe was actually via European energy stocks. With the recovery in the price of oil, we were able to reduce our exposure and reposition to European healthcare.
Japan has been mixed. Japan rallied quite a bit. We lined our exposure up and we still like Japan. Japanese domestic companies look attractive. There are a lot of hidden assets on Japanese balance sheets such as cash and property which are not reflected in asset prices.
We still like Europe and Japan. Generally, we have a five-year view. We are not all the way through but hopefully they’ll turn out to be good investments.
In contrast, is the US market overvalued?
We have felt like the US has looked expensive for some time and we still think so. The fundamental performance of US stocks has surprised us on the upside. I think it has surprised a number of investors. Corporate profits are the main drivers of the US outperformance against other markets. Profits have started to slow down a bit and I would argue that valuations are starting to get even more stretched. If we look at what’s baked into the price of the S&P 500 at 3,000, we think companies are going to struggle to meet some of those expectations. The US has some of the best companies in the world but what matters is the price you pay for them. We have been early on the US call. In the long term, we feel good about it, but it’s been very painful.
How vulnerable is the Indian market to an oil shock?
India imports a lot of oil and when the price of something you import a lot goes up, it can cause inflation and squeeze economic growth. If it persists, it can negatively impact the economy. However, these things tend to be short term. The Indian economy is resilient and vibrant. I don’t see this as a major negative. Markets adapt.