India stands out among the emerging markets: Markus Schomer

Markus Schomer, Chief Economic Strategist at PineBridge Investments talks about the US and Japanese economies, the weaknesses in China and why India stands out among emerging markets in an interview with Mahesh Nayak. Edited excerpts:

Q. What is your view on the recent speech by US Fed Chairperson Janet Yellen?

A. I think US monetary policy under Janet Yellen is a logical continuation of the policies implemented by Ben Bernanke. It is somewhat of a coincidence that he presided over the unconventional easing programme; she will preside over its winding down. I think her comments at the last FOMC meeting - defining the time period between the end of tapering and the first rate hike around six months - and her speech at the end of March - where she reiterated the commitment to maintain extraordinary support for the recovery for some time to come - are both consistent with our expectations of a first rate hike in the third quarter of next year and a more gradual rate hike cycle.

Q. Do you believe that Fed will reverse its stance and pump in money in the second half of 2014?

A. No, barring a major external shock, the chances the Fed reversing its current taper pace seem very low. If the 'soft patch' over the winter didn't prompt a pause or slowdown, not much else will.

Q. What is your view on US interest rates? By when do you see them increasing? Till when do you see Fed keeping an easy monetary policy?

A. US interest rates will remain generally low. We expect the first rate increase in July of 2015 and rates to reach 1 per cent by the end of 2015 and 2 per cent by the end of 2016.

Q. Similarly what is your view on Japan and its economy?   

A. Abenomics is working, but it needs more stimulus to prevent it from running out of fuel. Right now, the effect of the April Consumption Tax hike distorts the economic news flow and is likely to slow growth in the second quarter. In response, we expect the Bank of Japan will increase its Asset Purchase Programme in May or June. As a result of more quantitative easing (QE) and stronger global growth, Japan's recovery will pick up pace again in the second half of the year.

Q. What is your view of emerging markets and on the Indian equity markets for 2014?

A. Emerging markets will continue to face challenges this year. There are three problems. First, global growth is still weak. We are still waiting for a sustained improvement in the US, and acceleration in Europe's recovery. Second, the Fed's tapering decision has raised the cost of financing governments and business investment. Third, China's slowdown is not just a short term headwind, but a structural change that removes a significant source of growth for emerging markets. 2015 should be a better year for them when we are likely to see a more synchronized global recovery.

Q. Would you be a buyer in the Indian market and why?

A. India stands out among the emerging markets as one of the better macro stories. I cannot comment on market valuation and the rally in recent months has surely priced in much of the expected improvements in India's fundamentals. However, the election and the potential for major reform announcements are still source for further positive surprises. In addition, a stronger Rupee should attract more foreign portfolio inflows. I guess what I am saying is there could still be more upside to India equities.

Q. What's your view on the Indian rupee? Where do you see it at the end of 2014?

A. We don't have a point forecast for the Rupee, but the combination of improving economies governance, stronger growth and high interest rates should keep downward pressure on the Rupee. I wouldn't be surprised if we test the pre-Fragile-5 crisis levels (around 55) in the not too distant future. India is the only member of the original Fragile-5 club that could soon be looking much better compared to pre-May 2013. Hence, its currency could be trading even stronger against the dollar.

Q. What are your concerns for India and why?

A. I would say I have mostly positive 'concerns' about India. I think the elections provide a great opportunity to revive the reform effort that boosted India's growth rate in the late 1990s. Add to that, the very effective new head of the RBI and India could benefit from a period of sharply improved macro policy. If I had to list a negative concern, it would be the inability to contain budget and current account deficits. The latter may remerge as an issue when India's growth rate picks up again; the former will be the new government's biggest challenge.