I think there is quite a lot of risk going around the place. With zero interest rates in the west and the likelihood of relatively low zero returns in economies, and there is a lot of money being mobilised in a lot of different directions and that is going to create bubbles.
If you would know Minsky, his view is that we as humans are essentially bubble blowing machines. So there is no reason why we cannot blow a new bubble. There is a lot of money moving into emerging markets, moving into Asia, into Brazil. There is a lot of froth.
You have seen emerging markets. Which ones do you think presents low risk or looks attractive
I think of the, lets call it the Big Four the BRIC, we prefer India and Brazil. Russia, to be honest is outside our realm- there are a lot of issues there. We prefer to leave that alone. This was the defining week for China because of the announcement of the rights issue and the capital raising for the Chinese banks. I think that starts to tell you that the Chinese are aware of what is ahead. They are doing the right thing in the sense at this point for them when there is plenty of money there you would want to make your balance sheets strong and China is doing that, unlike England, where they are trying to build the balance sheet after the sad events that happened.
Brazil we have been keen on. We have been very bullish on Brazil for a number of years. We have a few concerns there. Its a very interesting country because it is self sufficient in water, doesnt really have any enemies and it has got a lot of resources. We like Brazil but are a bit concerned about the politics there. So we need to watch that carefully. Here, I think, India has come out in the last two or three years. There are obviously issues here, you have got fiscal issues, you have got inflation picking up. Also there is this sway of small emerging markets which we think are very exciting, you know in Africa and South America as well.
What would be the constraints for India What could really go wrong now
I think what could go wrong is inflation. For all emerging markets the risk is where there is cheap money and the fact that it is flowing into everything from gold to food to metal to equities at the moment, its blowing its bubble. So our concern is where you are seeing these pressure points starting to appear. You know the fact that you have import rise again, the petroleum prices are going up and how you keep a lid on that without raising rates too much because, I am not sure significantly higher interest rates here will do anyone any favors.
Theres this huge commodity bubble expected. Whats your take on that
There is huge liquidity out there going into all sorts of financial and real assets and you know if you go back to my thought concerns on China, the flip side could be if China had to pull in the horns quite significantly. Its purchasing in the commodities market if they started to come off then lot of these commodities would start coming down. I think a lot rides on the US stocks. At the moment it appears to be a one way bet that its going down but risk aversion is quite low at the moment compared to where it was in last eight months. If you started seeing that risk aversion comes back up again or if you got a surprise on the interest rates, for example a snap back in the US dollars, it could change the whole picture. My biggest personal concern, is that we are getting another credit fuelled extraordinary event.
Lot of money that is coming into India is through dollar carry trade. Whats your view on that or how dangerous can it be
I always get very worried when everything is so obviously obvious. The fact that the whole world thinks there is an unbelievable carry trade happening worries me slightly. But if what you are saying is right then everyone needs to be very nervous about the snap back in the U.S dollar and interest rates, broadly in the West, cause in the UK there is a view that there is also a carry trade developing in the Pound. Effectively zero interest rates, government buying back - start giving people essentially free money. So there are simple places that your carry trade could be developed. So if interest rates start to go up you dont get a snap back in any of these currencies. If there is this mega carry trade going on, then obviously people got to be worried because money could be pulled out. But I have to say is that (I have been doing this for a very small length of time)of the sheer quantity of money that is supposed to be being mobilized and its a huge amount - not all of it is a carry trade. The hedge funds can only borrow a certain amount and the banks obviously can do quite a lot because they have been given the Fed window. Certainly a lot of the hedge funds, that we know very well, are looking at places like India and other emerging markets for long term investments. They are trying to mobilize money for the longer term. So there is lot of money coming into these places.
It is hard to argue all of it is popped. I think a lot of it could well be more measured than the worries are.
Looking at India what are the sectors which investors are looking at and find very attractive at the moment
The obvious one is infrastructure and related areas, be it cement, or be it electrical distribution, or electricity generation and probably things that we havent even thought about. I think people are intrigued by how India leapfrogs technology and gets power and telecom, internet and education out to everybody. I think a lot rides on that. There is a lot of innovation going on here. The interesting thing is the next ten years here - to find out how this highly educated, very tech savvy, energetic generation fare and whats going to come out of them. A number of people would argue that you could see the next goose come out of here. I havent got a clue what that might be but you will an amazing amount of interesting innovations developing here. One of the important things here and certain countries in east Asia is their ability to think laterally or take things in a different direction unlike in Japan where they are not so good at going off in a tangent and coming up with something completely new. They are very good at progressive things and re engineering. I think that will be the surprise when somebody here comes up with something super interesting. I think thats more likely here given the way the mind seems to work here!
You mentioned India as attractive. On a very short term basis do you see valuations being stretched here
Without doubt. A lot of things that Prime Minister Singh says are great and corporates see a quite a lot of visibility. If that visibility translates into upgrades in earning then maybe it is not as expensive as it looks today, this minute. We wait and see. But certainly it is not cheap, more so in the bigger caps. I think you go down the market capital and you see more value. I think you have to fight hard to find value at the moment which is our job at Centrum to find cheaper stocks. You could well see a correction. All of Asia, the valuations are stretched. Our clients, the money managers, have to work very hard to get out of stuff that looks slightly stretched. But the good news is that you can quite often find stuff thats cheaper or of relatively good value.
So what is that you advising your client stay away from India or wait for a while
I think as always it is a stock pick and the clients are doing that or should be doing that. They are doing their job on a daily basis look at valuations, weigh over your target prices (have you gone past them), dont get greedy because if you saw a company worth X and now its worth X plus, then is there a reason to continue to hold it or do you recycle that money and try and find another company where you see there is sufficient upside. The whole world at the moment, it always is, about risk and reward. I guess thats where you are now. If the stuff is expensive, let it go, look for something else or just hold the cash and thats what we would be recommending. But broadly the trend is that India is in its ascendancy in a lot of ways and that is what we are looking at. And for the people that have never invested here- we are bringing international investors to India to meet companies, to get a feel of the place, to decide what they like so that if there is a correction of any sorts, they are ready to purchase.