Global growth is likely to remain weak and volatility is set to continue, says Philip Poole, global head of macro and investment strategy, HSBC Global Asset Management. In an interview with FE?s Devangi Gandhi, Poole says strong fundamentals of emerging markets could help them decouple from developed markets. Excerpts:
What is your take on the recent developments in European debt crisis?
European policymakers have made clear progress on the debt crisis, especially in taking measures to prevent and deal with potential defaults. This includes boosting the central bailout fund, providing liquidity and pushing debt laden countries to reduce debt. However, more needs to be done to convince investors that we are nearing the end, and solving this problem is likely to take many years. Meanwhile, political gridlock in the US is likely to stunt progress on deficit reduction. As a result, global growth is likely to remain weak to moderate, and volatility is set to continue. While emerging markets (EM) may continue to be affected by this, their strong fundamentals suggest that they may gradually decouple from developed markets.
Do you think markets have priced in uncertainties around Europe? How big a threat is the US political gridlock on deficit reduction?
I think Eurozone problems are largely priced in. Although I do not see a sudden end to the uncertainty, I think by the end of the first half, the path to a solution will be clear and it will be down to implementation of adjustment programmes and how rapidly the euro zone economies can grow.
You have said emerging markets may gradually decouple from Developed markets. How do you think this can happen as decoupling theories have consistently been proven wrong since 2008?
Global growth is likely to remain weak and moderate and volatility is set to continue. Though EMs will get affected by this, their strong fundamentals may help them decouple from developed markets. Consumption in emerging markets is projected to grow strongly, driven by stronger fundamentals, demographics and infrastructure spending than developed markets. Country such as China are likely to drive consumption growth in emerging markets, and companies with exposure to similar themes may benefit.
Asia still remains in good shape with stronger public finances and continuation of sovereign credit ratings upgrades. Asia ex-Japan has held up better than developed markets but has still been impacted by the European debt crisis. Expectations for growth are weak in the first quarter of 2012 and inflationary pressure is likely to continue weakening in this environment.
Asian governments, thus, have room to ease monetary policy to stimulate growth. The region still remains in good shape with stronger public finances and continuation of sovereign credit ratings upgrades. Even, corporate earnings growth remains supportive. Valuations for Asian equities are very attractive and suggest a positive return in 2012.
What is your outlook on equities as an asset class in 2012?
Solid corporate health and very attractive valuations also support HSBC?s long-term positive view on equities, which are now trading at very attractive levels relative to history. Global emerging markets will continue to grow as increased wealth leads to higher levels of domestic consumption. Driven by factors such as industrialisation and urbanisation, as well as more robust fiscal positions than many western economies, our long-term outlook for emerging market economies remains strong. From an investment point of view, this suggests a positive stance towards equities, emerging market currencies and Asian bonds.
We currently favour the so-called cyclical sectors in emerging markets, namely industrials, materials, financials and energy as central banks in countries, including China, Brazil, Indonesia and Thailand have cut interest rates (or reserve ratios) to stimulate growth. Many such countries still have scope to ease further while in many Western countries rates are already near zero and public debt is significant.
How strong is India’s consumption story in your opinion, given that most EM fund managers have maintained their underweight on Indian market?
A very strong long-term theme given the underlying demographics and urbanisation story. Moreover, the discretionary consumption stocks are much more attractive valuation-wise now. In the near-term, if inflation comes down further it will allow the RBI to cut interest rates.
