ET NowIn a chat with ET Now's Tanvir Gill, Jerry Webman, Chief Economist, Oppenheimer Funds, shares his views on the Indian Markets. Edited Excerpts:
Tanvir Gill: We have had three rate cuts in a row. The market is now nervous about perhaps there being an intermediate pause. How do you react to the RBI's policy stance?
Jerry Webman: The RBI has, as you said, lowered rates to something like 7.25. They are in a wait-and-see mode right now. There is a lot of concern about the monsoon and what happens to food price inflation. That is a much bigger issue in India. Many of us outside India have to understand that it is a much bigger issue economically and also politically, than is in a lot of other places. Listening to what Governor Rajan has said is that for the time being there is enough monetary stimulus for the economy to grow, but they need to be very cautious on the inflation side.
Tanvir Gill: Yes, but the RBI has revised growth lower to 7.6%. If you have to focus on growth, a fraction of the market believes that you need to be more aggressive with the rates. Do you think that in Governor Rajan's approach, there is perhaps one-off extra caution towards handling inflation for now?
Jerry Webman: There is a limit to what monetary policy can do. There is a transmission that has to occur. Indian banks have a non-performing loan problem. There are a lot of companies that might not actually be able to absorb a lot more credit at this point. Whether much lower rates would really stimulate the economy strongly or not is one question.
The other thing in people's mind is inflation. In the US, we have to look back to the 1970s to get ourselves particularly worried about inflation. India's memory does not have to go back quite that far. There is a fear that a rate cut along those lines of agricultural issue, say the droughts of 2002, could lead to a spike in inflation. That would be very damaging. Inflation is damaging towards economy domestically, and also would be damaging to the western world's confidence in the strength and the resilience of the Indian economy.
Tanvir Gill: But do you think the three rate cuts that have come by so far are enough to stimulate the economy to support growth?
Jerry Webman: They are enough to support growth. We shall see there is a fine line to be walked on. You would rather see growth a little slower and avoid inflation, which will damage growth in the long term. I am not going to second- guess the RBI. I know they have taken a lot of criticism. We know also that monetary policy, in the famous quote of the great American monetarist Milton Friedman, works with long and variable lags. If you had these three rate cuts, we do not really know how they will work through the real economy. It is probably appropriate to give them some time to work through.
Tanvir Gill: How much time? Time is difficult to call in the market.
Jerry Webman: Of course, it is difficult. It can take several quarters for a rate cut to begin to have effect. I am sure we are going to talk about the US Fed. But you want to make sure that you protected the currency and rates in India from the potential of a US rise in rates later on this year. So, it is justifiable to be cautious at this point.
Tanvir Gill: What are your own growth projections for India? The government is talking about 8-8.5% being the potential. We are closing into that mark with last reported numbers being closer to 7.5%. Do you think that in an environment, where globally there is a struggle for growth, India can actually stand out and outperform?
Jerry Webman: Well, tough question. I do not run an economic model of India independently. I know what other people have said. I think that the forecast in kind of 7.5 and 7.25 range is likely intermediate-term estimate of the India's economic growth potential. I do not think there is a person in the world who would not be glad to see over 8% growht in India. But it is quite optimistic.
India does need to grow with domestic demand. Particularly on the investment side, India needs to see both private and public investment step up, infrastructure lags. Not that in the US, our infrastructure is anything to brag about. But we are not to complain. We both do invest in it so that needs to happen in India.
Tanvir Gill: How do you see the investment cycle picking up from here? It is again a big debate like you highlighted? Governor Rajan has highlighted that too in his speech that there needs to be enough push to investment.
Jerry Webman: Well, it is hard to know. As we said before, we know that their financial system is that the banks face some challenge that makes it hard to extend credit right now. This is a question in many countries, China being the extreme exception. The question is why have we had as little investments as we have had. We have been slow to have both public and private investment in the US. India faces the same issue of the reforms we expected to have taken place over the last year. There is some disappointment in the Delhi-Mumbai industrial corridor. We need to see land acquisition, credit issues. Many of the infrastructure companies in India are pretty heavily indebted.
Tanvir Gill: Doesn't a part of the answer lie with pushing public investment first and then that would have some sort of a domino effect on private companies following suit and thereby stepping up on expansion?
Jerry Webman: Both India and US need to do something about infrastructure investment. From different basis and different ways, I think that would increase the viability of private investment as well. This is a much more privatised economy and we are starting to see some pick-up in private investment here without anything happening on the public side. So we have to work in consent.
Tanvir Gill: What about the equity markets? The question over there is really about earnings growth. How much can that support the rise in the equity markets? We have seen a correction over the last couple of weeks and markets have been very volatile. Do you think that at some point in this financial year, there would be a pick-up in earnings?
Jerry Webman: It has been disappointing. The percent of GDP that is in corporate earnings is very well point in India. One would think that even with 7.5- 7.75% growth, one would see some pick up in earnings. So, we will be hopeful about that. I think the investors are going to have to be very selective, though, and finding companies that do not have a leverage problem and that they are able to deal with the regulatory, infrastructure challenges that Indian companies still face. Investors in India and among ourselves, outside India, will have to be very selective to find a companies that can work.
Tanvir Gill: How does that translate into valuations for the market, which, post-correction, is at about 14-15 times? Do you think that the market is at the lower end of the fair range, which means that it is still in the attractive zone?
Jerry Webman: I think the Indian market is one of the more attractively valued markets in the world. That said, there were probably some companies that deserve to have low valuations. Our job is to find out when those valuations can improve. There is considerable room for improvement. I think good growth, as we were expecting over the next year, in the services sector particularly, should be valuable.
Tanvir Gill: Last year, India was the best-performing emerging market. This year it is at the lower rung. What will change sentiment on India? One question that the Street is asking is the trigger that will take the market higher from here.
Jerry Webman: I do not know if markets ever look for a trigger. We look for a trigger. I think what happened is that we will start finding some undervalued companies. Investment will start moving in those directions. It will cause people to look a little more broadly.
Tanvir Gill: But would that happen now? Would that happen over the next years?
Jerry Webman: We shall see. I think there is concern now on the reform side. International investors are concerned about the slow pace of reform. There were high expectations. Those of us around the world, we will look for some movement on reform, whether it is the goods and services tax (GST) move forward or more rationalisation in the administration. May be the Licence Raj weakens a little bit more. I think we are going to look for some indication on the economic reform side.
Tanvir Gill: At a broad level, what is the call in India right now?
Jerry Webman: I think the call in India is there are some really good companies, but we are cautious on the overall potential of the Indian market.
Tanvir Gill: What about the currency then, because that one has been resilient? The intrinsic value of the rupee has been fairly good. Do you think that that would continue, given Forex reserves are at record highs? Do you think India is fairly insulated compared to other emerging markets in an environment if the FED hikes rates?
Jerry Webman: Here, we come back to the RBI again. They had intervened sometimes aggressively. They got the reserves to do it. They said they would defend 75 and I think that most market participants think that it is a defensible level. There is reasonable confidence in the rupee right now. I am saying relative to the dollar, it has been a pretty good performer relative to everybody else’s currency around the world.
Tanvir Gill: Do you think that will continue?
Jerry Webman: I think it will continue. We expect there is going to be some improvement in the current account through the rest of this year. There is good reason to think that does happen. Central bank will intervene if they need to. I think that confidence in the rupee is appropriate at this point.
Tanvir Gill: The bond market in India. Is there interest there? You think from funds?
Jerry Webman: India is one of the higher yielding countries in the world. I should have done my homework and looked at what foreign flows into and out of the market had been. So, this kind of 7.5%-7.75% range on the 10-year bond is a reasonable level. I do not see a big rally from there, but I think that is a reasonable level to maintain global interest.
Tanvir Gill: Talk about global interest. The word on the Street is that emerging markets have good exposure to India. Emerging market funds just have good exposure to India. But it is really going to be a game changer when global funds start stepping up their investment. In your findings, what is the sense that you are getting?
Jerry Webman: I can only speak about Oppenheimer funds and what we have done. Our global investors have always had an interest in India and we do not ever think about country overweight. We have always been able to find companies in India, particularly in the service sector, that make sense. We have done that not just for our developing markets but for our global equity portfolios as well. There are some wonderful companies in India and we have owned them over time.
Tanvir Gill: When you are saying you are cautious on India, is there an upside that you are factoring into that view? Are you cautiously optimistic or you just cautious?
Jerry Webman: We are so company by company that I do not think it is fair to generalise about a view of India. We are, I would say, somewhat skeptical about the pace of reform and, therefore, look cautiously at companies that are dependent on major changes looking forward.
Tanvir Gill: Let me kind of rephrase that question. From last year, when India was the best performing emerging market, how has the view changed?
Jerry Webman: I think our view has not changed very much. Even a year ago, we understood how difficult the problems of the labour market, administrative, licensing, decentralisation, tax reform would be in India. I do not think we ever got enthusiastic. But we are still finding great companies.
Tanvir Gill: And what would make you be cautiously optimistic or make you optimistic on the market? You highlighted the pace of reforms. Is that pretty much the key?
Jerry Webman: I think the pace of reforms. We will hope to see the agricultural sector do well. We would love to see the prosperity move more toward the government expectation than the central bank's expectations. I think that is probably the right way to think about it.
Tanvir Gill: Let us talk about US. The big question mark actually is when will the Fed move on rates? The data that we have got so far suggest that the economy is not looking very strong, but it is not looking very weak either, which is a tricky point. What is the view on when the Fed would move on rates?
Jerry Webman: I think the big question is not what the Fed does. The big question is what the US consumer does. I say that because obviously the Fed is very important to everybody around the world. Let us look at what the Fed is looking at. When they say data-dependent, it is not just they touched rates. They are trying to see if the US economy will accelerate. What we really need for the US economy to accelerate is for the US consumer to accelerate. We have always said that the favourite pastime of the American public is to buy things. We have been little slow to buy things in recent years. I think the Fed is going to be watching for some resilience on the consumer side and therefore use that as a cue to move.
I can only tell you what they said. I think they have been very clear about this. The highest probability which is less than 50%, is that they will raise rates by 25 bps in September and higher probability by the end of the year.
Tanvir Gill: Highest probability?
Jerry Webman: Yes, I mean that is probable. I will buy the end of year. I think we get over 50% of a likelihood of interest rate rise.
Tanvir Gill: What about rates being pushed? The whole discussion of rate hike being pushed into 2016, what is the probability of that?
Jerry Webman: The IMF has recently said that they think we should wait till 2016. I am sure there has been a discussion on why they are saying that or why they are not saying it. It could happen. That is why I say watch what the US consumers do, how much stuff we buy. The housing market in the US has begun to perk up a little bit and employment remains quite strong. Employment among 25 to 35-years-old has improved a lot. That is a good thing because that is the age group where people have a little more money, they might buy a house, a few things. They might invest. We will watch. We will watch for some growth in consumption.
Tanvir Gill: I also want to understand that, if as per expectation, a rate hike does come in September, would it just be a token rate hike?
Jerry Webman: It is pretty clear they would not do what they did in the last 2004-06 hiking cycle, which is doing 25 bps at every meeting. You can count on it. You can take a very speculative position in the derivatives market based on it. This is what they are not going to do again. On the other hand, going back to the previous rate cycle of 1994, where we did not know what they were going to do. They would do a 50, 25, skip. So they do not want to be completely unpredictable either. I think they will do one initial rate hike. As we talked about the RBI. They are waiting to see market reaction and may be some economic reaction and then judge when the next hike should be. They would give us some clues but no promises.
Tanvir Gill: Then what would that rate hike mean for the market? What is your view on how the markets would get into and out of the event, sssuming that a rate hike will happen in September?
Jerry Webman: Let us talk about US domestic markets and then we can think a little bit globally. US domestic markets have typically traded off a little bit at the time of initial rate hike. But in fact they have gone up from there. The history is that the equity markets do pretty well after US rate hike. It is only after the hikes have gone far enough to really slow the economy, that it begins to damage the performance of the equity markets. After an initial hike, we might get a little bit volatility around that time. But it is not going to be negative over months.
Tanvir Gill: The other worry with Fed rate hike is that at the end of the day, it is a 25 bps hike. How much does it move the needle?
Jerry Webman: That is probably the right way to think about it. I do not think it does much to the real economy. Obviously it changes some things. On the margin, it probably affects home ownership. But US corporations have such strong balance sheets now on the whole that they do not need big access to capital in order for expansion plans. It is not because interest rates are at particular level. I do not think in the real economy, 25 bps matters much at all.
Tanvir Gill: Would you say that it would pretty much be a non-event given just the anticipation around it if it comes back?
Jerry Webman: I think. Except it never is. I know it feels like it should be and this is clearly telegraphed in 30 some years I have been in this industry. It is the clearest it has been. There could be some volatility particularly because the Fed has used, as other central banks have, not just the overnight lending rate but a variety of monetary policies. How those all play together might give some uncertainty in the market when they happen.
Tanvir Gill: Where are you finding the opportunity to make money? Where is the alpha opportunity for the second half of this year?
Jerry Webman: It is always going to be finding great companies that can deal with adverse situations that we have talked about. I think we are going to find many of those companies in the developing world and the emerging markets. There will be some great ones in the US, some very good ones in Europe. Given valuations and what the markets have done, we may find more of those opportunities in the emerging markets.
Tanvir Gill: As an asset class, last year was a great year for equities. Region-wise, it has been good. Europe has done well. Germany has done well. Select markets have performed. Between equities and bonds, also perhaps currencies, where is the opportunity?
Jerry Webman: Between bonds and equities, I would favour equities. We are still in a growth cycle almost everywhere, early, late, middle. That means equities over bonds. Certainly over government bonds. The more yielding parts of the markets may be quite fine for people but generally speaking, equities over government bonds.
Tanvir Gill: We have had three rate cuts in a row. The market is now nervous about perhaps there being an intermediate pause. How do you react to the RBI's policy stance?
Jerry Webman: The RBI has, as you said, lowered rates to something like 7.25. They are in a wait-and-see mode right now. There is a lot of concern about the monsoon and what happens to food price inflation. That is a much bigger issue in India. Many of us outside India have to understand that it is a much bigger issue economically and also politically, than is in a lot of other places. Listening to what Governor Rajan has said is that for the time being there is enough monetary stimulus for the economy to grow, but they need to be very cautious on the inflation side.
Tanvir Gill: Yes, but the RBI has revised growth lower to 7.6%. If you have to focus on growth, a fraction of the market believes that you need to be more aggressive with the rates. Do you think that in Governor Rajan's approach, there is perhaps one-off extra caution towards handling inflation for now?
Jerry Webman: There is a limit to what monetary policy can do. There is a transmission that has to occur. Indian banks have a non-performing loan problem. There are a lot of companies that might not actually be able to absorb a lot more credit at this point. Whether much lower rates would really stimulate the economy strongly or not is one question.
The other thing in people's mind is inflation. In the US, we have to look back to the 1970s to get ourselves particularly worried about inflation. India's memory does not have to go back quite that far. There is a fear that a rate cut along those lines of agricultural issue, say the droughts of 2002, could lead to a spike in inflation. That would be very damaging. Inflation is damaging towards economy domestically, and also would be damaging to the western world's confidence in the strength and the resilience of the Indian economy.
Tanvir Gill: But do you think the three rate cuts that have come by so far are enough to stimulate the economy to support growth?
Jerry Webman: They are enough to support growth. We shall see there is a fine line to be walked on. You would rather see growth a little slower and avoid inflation, which will damage growth in the long term. I am not going to second- guess the RBI. I know they have taken a lot of criticism. We know also that monetary policy, in the famous quote of the great American monetarist Milton Friedman, works with long and variable lags. If you had these three rate cuts, we do not really know how they will work through the real economy. It is probably appropriate to give them some time to work through.
Tanvir Gill: How much time? Time is difficult to call in the market.
Jerry Webman: Of course, it is difficult. It can take several quarters for a rate cut to begin to have effect. I am sure we are going to talk about the US Fed. But you want to make sure that you protected the currency and rates in India from the potential of a US rise in rates later on this year. So, it is justifiable to be cautious at this point.
Tanvir Gill: What are your own growth projections for India? The government is talking about 8-8.5% being the potential. We are closing into that mark with last reported numbers being closer to 7.5%. Do you think that in an environment, where globally there is a struggle for growth, India can actually stand out and outperform?
Jerry Webman: Well, tough question. I do not run an economic model of India independently. I know what other people have said. I think that the forecast in kind of 7.5 and 7.25 range is likely intermediate-term estimate of the India's economic growth potential. I do not think there is a person in the world who would not be glad to see over 8% growht in India. But it is quite optimistic.
India does need to grow with domestic demand. Particularly on the investment side, India needs to see both private and public investment step up, infrastructure lags. Not that in the US, our infrastructure is anything to brag about. But we are not to complain. We both do invest in it so that needs to happen in India.
Tanvir Gill: How do you see the investment cycle picking up from here? It is again a big debate like you highlighted? Governor Rajan has highlighted that too in his speech that there needs to be enough push to investment.
Jerry Webman: Well, it is hard to know. As we said before, we know that their financial system is that the banks face some challenge that makes it hard to extend credit right now. This is a question in many countries, China being the extreme exception. The question is why have we had as little investments as we have had. We have been slow to have both public and private investment in the US. India faces the same issue of the reforms we expected to have taken place over the last year. There is some disappointment in the Delhi-Mumbai industrial corridor. We need to see land acquisition, credit issues. Many of the infrastructure companies in India are pretty heavily indebted.
Tanvir Gill: Doesn't a part of the answer lie with pushing public investment first and then that would have some sort of a domino effect on private companies following suit and thereby stepping up on expansion?
Jerry Webman: Both India and US need to do something about infrastructure investment. From different basis and different ways, I think that would increase the viability of private investment as well. This is a much more privatised economy and we are starting to see some pick-up in private investment here without anything happening on the public side. So we have to work in consent.
Tanvir Gill: What about the equity markets? The question over there is really about earnings growth. How much can that support the rise in the equity markets? We have seen a correction over the last couple of weeks and markets have been very volatile. Do you think that at some point in this financial year, there would be a pick-up in earnings?
Jerry Webman: It has been disappointing. The percent of GDP that is in corporate earnings is very well point in India. One would think that even with 7.5- 7.75% growth, one would see some pick up in earnings. So, we will be hopeful about that. I think the investors are going to have to be very selective, though, and finding companies that do not have a leverage problem and that they are able to deal with the regulatory, infrastructure challenges that Indian companies still face. Investors in India and among ourselves, outside India, will have to be very selective to find a companies that can work.
Tanvir Gill: How does that translate into valuations for the market, which, post-correction, is at about 14-15 times? Do you think that the market is at the lower end of the fair range, which means that it is still in the attractive zone?
Jerry Webman: I think the Indian market is one of the more attractively valued markets in the world. That said, there were probably some companies that deserve to have low valuations. Our job is to find out when those valuations can improve. There is considerable room for improvement. I think good growth, as we were expecting over the next year, in the services sector particularly, should be valuable.
Tanvir Gill: Last year, India was the best-performing emerging market. This year it is at the lower rung. What will change sentiment on India? One question that the Street is asking is the trigger that will take the market higher from here.
Jerry Webman: I do not know if markets ever look for a trigger. We look for a trigger. I think what happened is that we will start finding some undervalued companies. Investment will start moving in those directions. It will cause people to look a little more broadly.
Tanvir Gill: But would that happen now? Would that happen over the next years?
Jerry Webman: We shall see. I think there is concern now on the reform side. International investors are concerned about the slow pace of reform. There were high expectations. Those of us around the world, we will look for some movement on reform, whether it is the goods and services tax (GST) move forward or more rationalisation in the administration. May be the Licence Raj weakens a little bit more. I think we are going to look for some indication on the economic reform side.
Tanvir Gill: At a broad level, what is the call in India right now?
Jerry Webman: I think the call in India is there are some really good companies, but we are cautious on the overall potential of the Indian market.
Tanvir Gill: What about the currency then, because that one has been resilient? The intrinsic value of the rupee has been fairly good. Do you think that that would continue, given Forex reserves are at record highs? Do you think India is fairly insulated compared to other emerging markets in an environment if the FED hikes rates?
Jerry Webman: Here, we come back to the RBI again. They had intervened sometimes aggressively. They got the reserves to do it. They said they would defend 75 and I think that most market participants think that it is a defensible level. There is reasonable confidence in the rupee right now. I am saying relative to the dollar, it has been a pretty good performer relative to everybody else’s currency around the world.
Tanvir Gill: Do you think that will continue?
Jerry Webman: I think it will continue. We expect there is going to be some improvement in the current account through the rest of this year. There is good reason to think that does happen. Central bank will intervene if they need to. I think that confidence in the rupee is appropriate at this point.
Tanvir Gill: The bond market in India. Is there interest there? You think from funds?
Jerry Webman: India is one of the higher yielding countries in the world. I should have done my homework and looked at what foreign flows into and out of the market had been. So, this kind of 7.5%-7.75% range on the 10-year bond is a reasonable level. I do not see a big rally from there, but I think that is a reasonable level to maintain global interest.
Tanvir Gill: Talk about global interest. The word on the Street is that emerging markets have good exposure to India. Emerging market funds just have good exposure to India. But it is really going to be a game changer when global funds start stepping up their investment. In your findings, what is the sense that you are getting?
Jerry Webman: I can only speak about Oppenheimer funds and what we have done. Our global investors have always had an interest in India and we do not ever think about country overweight. We have always been able to find companies in India, particularly in the service sector, that make sense. We have done that not just for our developing markets but for our global equity portfolios as well. There are some wonderful companies in India and we have owned them over time.
Tanvir Gill: When you are saying you are cautious on India, is there an upside that you are factoring into that view? Are you cautiously optimistic or you just cautious?
Jerry Webman: We are so company by company that I do not think it is fair to generalise about a view of India. We are, I would say, somewhat skeptical about the pace of reform and, therefore, look cautiously at companies that are dependent on major changes looking forward.
Tanvir Gill: Let me kind of rephrase that question. From last year, when India was the best performing emerging market, how has the view changed?
Jerry Webman: I think our view has not changed very much. Even a year ago, we understood how difficult the problems of the labour market, administrative, licensing, decentralisation, tax reform would be in India. I do not think we ever got enthusiastic. But we are still finding great companies.
Tanvir Gill: And what would make you be cautiously optimistic or make you optimistic on the market? You highlighted the pace of reforms. Is that pretty much the key?
Jerry Webman: I think the pace of reforms. We will hope to see the agricultural sector do well. We would love to see the prosperity move more toward the government expectation than the central bank's expectations. I think that is probably the right way to think about it.
Tanvir Gill: Let us talk about US. The big question mark actually is when will the Fed move on rates? The data that we have got so far suggest that the economy is not looking very strong, but it is not looking very weak either, which is a tricky point. What is the view on when the Fed would move on rates?
Jerry Webman: I think the big question is not what the Fed does. The big question is what the US consumer does. I say that because obviously the Fed is very important to everybody around the world. Let us look at what the Fed is looking at. When they say data-dependent, it is not just they touched rates. They are trying to see if the US economy will accelerate. What we really need for the US economy to accelerate is for the US consumer to accelerate. We have always said that the favourite pastime of the American public is to buy things. We have been little slow to buy things in recent years. I think the Fed is going to be watching for some resilience on the consumer side and therefore use that as a cue to move.
I can only tell you what they said. I think they have been very clear about this. The highest probability which is less than 50%, is that they will raise rates by 25 bps in September and higher probability by the end of the year.
Tanvir Gill: Highest probability?
Jerry Webman: Yes, I mean that is probable. I will buy the end of year. I think we get over 50% of a likelihood of interest rate rise.
Tanvir Gill: What about rates being pushed? The whole discussion of rate hike being pushed into 2016, what is the probability of that?
Jerry Webman: The IMF has recently said that they think we should wait till 2016. I am sure there has been a discussion on why they are saying that or why they are not saying it. It could happen. That is why I say watch what the US consumers do, how much stuff we buy. The housing market in the US has begun to perk up a little bit and employment remains quite strong. Employment among 25 to 35-years-old has improved a lot. That is a good thing because that is the age group where people have a little more money, they might buy a house, a few things. They might invest. We will watch. We will watch for some growth in consumption.
Tanvir Gill: I also want to understand that, if as per expectation, a rate hike does come in September, would it just be a token rate hike?
Jerry Webman: It is pretty clear they would not do what they did in the last 2004-06 hiking cycle, which is doing 25 bps at every meeting. You can count on it. You can take a very speculative position in the derivatives market based on it. This is what they are not going to do again. On the other hand, going back to the previous rate cycle of 1994, where we did not know what they were going to do. They would do a 50, 25, skip. So they do not want to be completely unpredictable either. I think they will do one initial rate hike. As we talked about the RBI. They are waiting to see market reaction and may be some economic reaction and then judge when the next hike should be. They would give us some clues but no promises.
Tanvir Gill: Then what would that rate hike mean for the market? What is your view on how the markets would get into and out of the event, sssuming that a rate hike will happen in September?
Jerry Webman: Let us talk about US domestic markets and then we can think a little bit globally. US domestic markets have typically traded off a little bit at the time of initial rate hike. But in fact they have gone up from there. The history is that the equity markets do pretty well after US rate hike. It is only after the hikes have gone far enough to really slow the economy, that it begins to damage the performance of the equity markets. After an initial hike, we might get a little bit volatility around that time. But it is not going to be negative over months.
Tanvir Gill: The other worry with Fed rate hike is that at the end of the day, it is a 25 bps hike. How much does it move the needle?
Jerry Webman: That is probably the right way to think about it. I do not think it does much to the real economy. Obviously it changes some things. On the margin, it probably affects home ownership. But US corporations have such strong balance sheets now on the whole that they do not need big access to capital in order for expansion plans. It is not because interest rates are at particular level. I do not think in the real economy, 25 bps matters much at all.
Tanvir Gill: Would you say that it would pretty much be a non-event given just the anticipation around it if it comes back?
Jerry Webman: I think. Except it never is. I know it feels like it should be and this is clearly telegraphed in 30 some years I have been in this industry. It is the clearest it has been. There could be some volatility particularly because the Fed has used, as other central banks have, not just the overnight lending rate but a variety of monetary policies. How those all play together might give some uncertainty in the market when they happen.
Tanvir Gill: Where are you finding the opportunity to make money? Where is the alpha opportunity for the second half of this year?
Jerry Webman: It is always going to be finding great companies that can deal with adverse situations that we have talked about. I think we are going to find many of those companies in the developing world and the emerging markets. There will be some great ones in the US, some very good ones in Europe. Given valuations and what the markets have done, we may find more of those opportunities in the emerging markets.
Tanvir Gill: As an asset class, last year was a great year for equities. Region-wise, it has been good. Europe has done well. Germany has done well. Select markets have performed. Between equities and bonds, also perhaps currencies, where is the opportunity?
Jerry Webman: Between bonds and equities, I would favour equities. We are still in a growth cycle almost everywhere, early, late, middle. That means equities over bonds. Certainly over government bonds. The more yielding parts of the markets may be quite fine for people but generally speaking, equities over government bonds.
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