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We don't expect India to have a balanced budget, says Brian Jacobsen of Wells Fargo Asset Management

Updated : January 28, 2019 06:52 AM IST

Ahead of the budget and the general elections, CNBC-TV18 speaks with leading global market masters about how they are approaching India ahead of these two crucial events. It also tries to glean the global context in which Indian economy and Indian earnings are situated. To discuss this Latha Venkatesh caught up with Brian Jacobsen Senior Investment Strategist of Wells Fargo Asset Management.

Q: What does 2019 hold for equities since many central banks are going to be constraining - cutting their balance sheets?

A: That is correct, yes that is one of the major concerns I think of investors - what is the path of central bank policy for 2019. At the moment it looks like investors are effectively pricing in central bankers being on hold for 2019. In the United States for the Federal Reserve Federal funds futures contracts are actually saying that the Fed might cut rates towards the end of 2019 or the beginning of 2020.

My team and the Multi-Asset Solutions team actually believe that's a little bit too pessimistic. A lot of central bankers still want to continue to normalise policy, even if it doesn't mean hiking rates, it could mean shrinking their balance sheets and that could sup up a little bit of the liquidity that has provided support to the financial markets over the last few years.

Our big theme for 2019 is that you should watch and wait and be prepared for a roller coaster ride.

Q: In that case what is your view of global growth especially because growth in US and China the first and the second largest economies of the world appear to be slowing?

A: US and China growth I think is on the top of a lot of investors mind. We know that in the United States, 2018 had about 3.50 percent GDP growth. In China growth was around 6.6 percent. 2019 is going to be step lower for both countries. But how much of a step lower is the big question.

From our view we think that people are little bit too pessimistic about the growth outlook. According to a lot of the consensus surveys that we look at US growth according to the consensus might only be 2 percent, we think it could actually be closer to 2.50 to 2.75 percent. In China the consensus seems to be calling for step down to around 6 percent growth. We think that it could be also to about 6.3 to 6.4 percent. So, on the margin we think that the market is pricing in a little bit too much pessimism and as a result we still continue to favour having exposure to equities and high yield fixed income to really capture that growth premium that you get from those two asset classes.

Q: Let me come to emerging markets which is where our interest is. Within emerging markets what would your pecking order be in terms of countries?

A: I think our favourite area right now is in Latin America and in China. We do like broadly Asian emerging markets that is probably our first preference - Asia EM followed up by Latin America.

Latin America you have Brazil. That has been on a tear as far as just performing very well since the election of Jair Bolsonaro as the President, maybe it has gone a little bit too fast here and so there is more upside potential to Asian EM. Within Asian EMs our favoured is I believe China. Mainly because people have been so focused on China and its relationship with United States. They had major sell off in 2018, valuations to us are very compelling. We think that the growth outlook is a lot more favourable than what is currently priced into equity markets.

Q: I don't see India in your pecking order, why is that? Is it because we are heading into a general elections?

A: I think that is one of the reasons why India is not at the top of our list for 2019. It is probably at the top of our list for the long term. If you are thinking about investing over the next 10 years. But if you are thinking about investing over the next 10 months there is a lot of uncertainty as to how this spring general elections will play out. One of our big concerns is about the policy outlook for India, both on the monetary policy and on the fiscal policy side.

When Modi was elected everybody viewed him as a reformer and he has indeed brought about some reforms. But his party hasn't fared very well in some of the regional elections, we don't think that he has made a lot of progress on some of the reforms that he had pledged to make. It seems like he is pivoted a little bit more towards some maybe more populist policies that don't necessarily encourage private sector activity, it is more focused on giving out your certain goodies to constituencies.

On the monetary policy side we are little concerned about the change in leadership. We really need to know how this new governor of the Reserve Bank of India is going to behave. Urjit Patel seemed very hawkish which was a plus, but mainly a minus as far as growth, he was very focused on inflation. But maybe the pendulum has swung a little bit too far in other direction where the new head might be a little bit too dovish. So, we really have to feel him out to see what sort of policies he will put into place before we can get a good read and what the outlook is.

Q: I do want more colour on what you think about fiscal policy and monetary policy. First fiscal, there is an interim budget due on February 1. There is a fear that a big farm relief package could come in, what are your fears and expectations?

A: We do pay attention to the budget and that is one of our concerns actually about investing in India and across a lot of the emerging markets that their focus tends to be a little bit too much on what are these budgets. We would rather focus on the fundamentals of the businesses that you can invest in and not necessarily have the future whether it is over the next 12 months or the next few years be so heavily dictated by swings in the budget that does it include farm relief, does it include infrastructure spending, does it include tax cuts, what are they going to do about the banking system. So, there is little bit too much policy risk with this fixation on the budget.

Broadly speaking for India, I think that a lot of people are looking for them to continue with opening up their markets to competition with trade policy, balancing the budget, we don't expect that they will have a balanced budget but at least to get the deficit under control. My guess is that with the interim budget, we will probably see a little bit more deficit spending and that could be slightly negative at least as far as the way foreign investors view yields and investment opportunities in India. It might actually be somewhat detrimental to the rupee outlook as far as foreign currency. The currency has depreciated pretty significantly since October and if they have too high of a deficit, the rupee could come under additional pressure.

Q: The other worry is that the budget could announce a large package - a farm spending programme and still kind of appear to meet the deficit and it could be therefore followed by a dovish monetary policy. How would you receive it if there was a dovish policy and a rate cut after such a budget?

A: From our perspective that would be a bad combination. If you had a larger budget deficit and then if you actually had monetary easing following that, the perception would be that monetary policy has become beholden to fiscal policy which can actually be a very negative thing especially in the emerging markets. If it is viewed that the monetary policy authority is effectively monetising the debt or the deficit spending, that tends to be a formula for faster inflation in the future. So, that would we think be quite a negative.

Q: What are you invested in and what would you want to add on? Would you wait before you make incremental investments?

A: Across our portfolios lot of them are very well diversified and so they do have some exposure. A lot of the exporters in India, if you think about some of the information technology companies lot of their sales come from outside of India and so with the depreciation of the rupee are in a slightly better competitive position.

So, we are very selectively investing there but we are not overweight in India like we had been in the past. So, it is now more of an underweight position. In order to get us to go overweight to India, I think we would want to see a little bit more fiscal discipline and monetary policy discipline as well.
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