At the start of the year, Macquarie Research came out with titled ‘ Rights, Wrongs & Returns: 2016 – Year of living dangerously’.
The base case scenario for the report was that 2016 will be another year without global growth engines. Although the U.S. is growing above the trend line, the pace remains too slow to inject sufficient demand and U.S. dollars into the global economy whilst neither Eurozone nor Japan or China are capable of adding much towards global momentum.
Hence, 2016 will be another year of no trade, volatile but mostly declining US$ liquidity and significant asset class volatilities. A poor environment for global traders, commodity producers and anyone with US$ borrowing mismatch.
The preference was for markets or countries that exhibit:
- Lower than average degree of external vulnerabilities
- Higher than average level of trapped domestic liquidity
- Higher than average degree of political stability and some (however faint) promise of domestic structural reform
- Lower than average exposure to commodity cycles, as a driver of liquidity, fiscal revenues or GDP.
- 2016 is not the year for commodity producers.
This points towards China, India, Philippines, Korea and/or Taiwan.
The report noted that since investment decisions are now almost entirely flow driven and hence every trade is overcrowded, the danger is that the slightest liquidity shift could cause an investor stampede. Being negative emerging market equities and positive US$ has for some time been the most overcrowded of trades. Whilst this does not necessarily make it wrong (consensus is always right, until it isn’t), it highlights a risk of potentially violent reversal, particularly in view of non-US monetary stimulation.
Macquarie’s view on India
Whilst we continue to believe that it is highly unlikely that India’s expected EPS growth rates into FY16-17 (18%) would ever come to pass and equity multiples are elevated, India satisfies most other key conditions.
India is the region’s greatest beneficiary of changing terms of trade. It helps to keep its inflation under control, assists in boosting current account and provides monetary space for the central bank.
Whilst we have never been excessively bullish on India’s reform agenda, nevertheless, small reforms that by-pass (rather than modify) bureaucracy could have a significant impact (i.e. ‘low hanging fruit’, a la Philippines over the last five years). The most obvious areas are technology substitution and supervision and GST tax, as well as the possibility of bankruptcy reform.
However we are yet to be convinced that any meaningful progress can be made in the key areas of labour market and land reform.
At the same time, India boasts some of the region’s best managed corporates (and hence it is not surprising that our ‘Quality & Stability’ portfolio has an India tilt).
In a recent chat with ET Now, Inderjeet Singh Bhatia of Macquarie Capital Securities (India) said that he believed the economy was showing some green shoots but remained fairly sporadic and is more a two-track kind of an economy.
He was of the opinion that EPC companies (an acronym for Engineering, Procurement, and Construction) will start to see things improving for them going forward but on the hardcore capital goods companies he remained much less sanguine – “it will take another 18 to 24 months for these companies to start seeing any revival”.
