ET NowIn an interview with ET Now, Khiem Do, Head-Asian Multi-Asset, Baring Asset Management, shares his views on the global markets and whether equities can outperform bonds. Excerpts:
ET Now: For the moment, both emerging markets and developed markets are in a sweet spot. Do you think good days are here to stay or is this as good as it gets?
Khiem Do: There is a positive momentum in favour of China, India, the rest of Asia and emerging markets relative to developed markets. This is basically because China has finally decided to loosen up its monetary and fiscal policies a bit, which has helped to restore and strengthen investor sentiment towards these asset classes.
ET Now: Currently, India is the market of choice for most of the global investors. Do you think it could remain like this for another year or so?
Khiem Do: The positive perception has been fueled by hopes of reforms in India. However, I do think that India will have to deliver on those reforms and bring about the expected level of growth since a lot has been priced in on that front and the market is not cheap at all. I think, over the next 12 months, India will have to deliver the growth and the reforms, in order to justify the current valuations. The delivery has to be strong.
ET Now: What is your sense on the IMF cutting the global growth forecast and what it could mean for global markets?
Khiem Do: In my opinion, the IMF has been slow to confirm their downgrade. The global analysts and economists have already downgraded global growth as a result of the first quarter which panned out in the US and China, marked by slow growth. Since a lot of that news has already been factored in, I do not think that investors care too much about the release of the IMF forecast.
ET Now: Given the way volatility is down and stock markets are at a multi-year high, it appears that no one is bothered about the geopolitical turnmoil in Iraq, Ukraine, Middle East and Russia?
Khiem Do: It is a fair point. Perhaps investors believe that there will be a political compromise or solution to these geopolitical disturbances and that the whole thing would probably not blow up. So, as of now, the glass from an investor’s viewpoint is half full and definitely not half empty. The reason for this is because the equity markets over the last 12 months have had a nice and strong positive momentum, which is also dominating equity investor sentiment as of now.
ET Now: Do you think equities can outperform bonds and if so, in which global markets do you see this trend emerging?
Khiem Do: The bond rates have surprised on the downside in terms of the lower yield year to date. At the beginning of this year, no one would have been able to predict that the US 10-year bond rate would be trading at 2.47% in July. Moreover, most other bond rates also have fallen.
However, upon comparing the total returns of equities against bonds, equities still tend to outperform bonds. In fact, with the economic recovery happening in the US, China and hopefully in India and the rest of the world, over the next 6 to 12 months equities should continue to outperform bonds.
ET Now: Do you think if US bond yields moving up could have an impact on global liquidity?
Khiem Do: This will depend on the extent on the rise. If the 10-year bond rate in the US were to rise from the current levels of 2.5% to above 3% over the next three to six months, it will definitely have an impact on the US equity markets and maybe some other global equity markets as well.
Unless earnings per share growth in the US are going to surprise massively on the upside, in which case, there will be a countervailing effect on the rise of bond yields. But that would require the EPS growth in the US to rise to 12% to 15% per annum over the next 12 months. Currently the EPS growth rate is only about 7%. Therefore, the EPS in the US will have to double from the current growth rate in order to offset potential wreck by bond yield to 3%, which is a difficult scenario to imagine.
Therefore, the conclusion has to be that if US bond yields were to rise above 3%, then that will definitely have negative impact on the equity markets.
ET Now: Would the dollar continue to appreciate?
Khiem Do: Once again, it depends on the currency we are looking at. When you consider Asian currencies, you will have to concede that they have done reasonably well against the US dollar in general, whereas the Euro, for instance, is under a bit more pressure. It really depends on which currency we look at.
ET Now: For the moment, both emerging markets and developed markets are in a sweet spot. Do you think good days are here to stay or is this as good as it gets?
Khiem Do: There is a positive momentum in favour of China, India, the rest of Asia and emerging markets relative to developed markets. This is basically because China has finally decided to loosen up its monetary and fiscal policies a bit, which has helped to restore and strengthen investor sentiment towards these asset classes.
ET Now: Currently, India is the market of choice for most of the global investors. Do you think it could remain like this for another year or so?
Khiem Do: The positive perception has been fueled by hopes of reforms in India. However, I do think that India will have to deliver on those reforms and bring about the expected level of growth since a lot has been priced in on that front and the market is not cheap at all. I think, over the next 12 months, India will have to deliver the growth and the reforms, in order to justify the current valuations. The delivery has to be strong.
ET Now: What is your sense on the IMF cutting the global growth forecast and what it could mean for global markets?
Khiem Do: In my opinion, the IMF has been slow to confirm their downgrade. The global analysts and economists have already downgraded global growth as a result of the first quarter which panned out in the US and China, marked by slow growth. Since a lot of that news has already been factored in, I do not think that investors care too much about the release of the IMF forecast.
ET Now: Given the way volatility is down and stock markets are at a multi-year high, it appears that no one is bothered about the geopolitical turnmoil in Iraq, Ukraine, Middle East and Russia?
Khiem Do: It is a fair point. Perhaps investors believe that there will be a political compromise or solution to these geopolitical disturbances and that the whole thing would probably not blow up. So, as of now, the glass from an investor’s viewpoint is half full and definitely not half empty. The reason for this is because the equity markets over the last 12 months have had a nice and strong positive momentum, which is also dominating equity investor sentiment as of now.
ET Now: Do you think equities can outperform bonds and if so, in which global markets do you see this trend emerging?
Khiem Do: The bond rates have surprised on the downside in terms of the lower yield year to date. At the beginning of this year, no one would have been able to predict that the US 10-year bond rate would be trading at 2.47% in July. Moreover, most other bond rates also have fallen.
However, upon comparing the total returns of equities against bonds, equities still tend to outperform bonds. In fact, with the economic recovery happening in the US, China and hopefully in India and the rest of the world, over the next 6 to 12 months equities should continue to outperform bonds.
Khiem Do: This will depend on the extent on the rise. If the 10-year bond rate in the US were to rise from the current levels of 2.5% to above 3% over the next three to six months, it will definitely have an impact on the US equity markets and maybe some other global equity markets as well.
Unless earnings per share growth in the US are going to surprise massively on the upside, in which case, there will be a countervailing effect on the rise of bond yields. But that would require the EPS growth in the US to rise to 12% to 15% per annum over the next 12 months. Currently the EPS growth rate is only about 7%. Therefore, the EPS in the US will have to double from the current growth rate in order to offset potential wreck by bond yield to 3%, which is a difficult scenario to imagine.
Therefore, the conclusion has to be that if US bond yields were to rise above 3%, then that will definitely have negative impact on the equity markets.
ET Now: Would the dollar continue to appreciate?
Khiem Do: Once again, it depends on the currency we are looking at. When you consider Asian currencies, you will have to concede that they have done reasonably well against the US dollar in general, whereas the Euro, for instance, is under a bit more pressure. It really depends on which currency we look at.
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