India’s a thriving economy, but too expensive in global context

As head of research at $382-billion Swiss wealth manager, Julius Baer, Christian Gattiker-Ericsson has a good view of the world economy and how money moves across the globe. In an interview with Joel Rebello, he spoke about falling global yields, flow of money and the Swiss bank’s preferred investments. Edited excerpts:Global yields are on the way down. What is causing this?There are two factors for yields falling across the globe. The monetary policy in the US and the trade tensions which made investors more risk averse and less growth friendly. Possibly the two are intertwined because we might see a reaction due to the fact there is uncertainty about trade. Therefore, there has been a recalibration about rate expectations. Twelve months ago, the US economy was super strong, wages were going up. The low-income bracket was making double-digit increase in wages, so inflation was pumping up. Then suddenly these trade tensions rose and then we got an escalation. Perception shifted — we almost saw a 100 basis points in US treasuries which is quite a massive move.What’s your view on the Indian market?In the global context, we are neutral on Indian equities. There is a sound structural background and it’s a thriving economy but in the global context the market is very expensive. If you follow the money and look at the currency markets, the money was moving back into the US market in the last three to four years. The US is a structurally deficit economy which they need to be in order to hold the global reserve currency. If you see such a currency going up against all odds, then you see that the capital is actually moving back into the dollar territory and that’s where the money went.Then there was this on-off relationship with Chinese stocks with the hot money going back and forth. The way we have been handling this is whenever there was a sizeable risk premium on emerging market bonds, we would go back and buy them. At this stage of the cycle, your strategy is to go into fixed income instead of equity because when rates rise, emerging markets are forced to deleverage which means you get a better risk as a bond investor because financial risk is lowered but it cuts the upside for the equity investors. We think the next decade will belong to the Chinese market because it is still sizeable.So money will move towards emerging markets then?There is potential, particularly on the fixed income side. There are even possibilities on the currency. We have been conservative and going into hot currency emerging market bonds but there is also very generous risk premium in some of the local currency fixed income. But this is so much like the late ’90s — you never know when the cycle will end because nobody rings the bell at the end of the cycle.At the beginning of the year, lots of investors were reading the prospects of a first rate cut which is priced by December 2018. We are not so sure. We think it will be a longer protracted thing. So, there are hardly any ‘buy and hold assets’ in emerging markets for now. It will change in the next cycle. I expect in the 2020s there will be a major easing cycle of the US monetary policy. This will start when recession will hit the US and our guess is it is 2021. So it will take another 12 to 18 months for the markets to price in an easing cycle and then we could see a major emerging markets boom similar to what we saw in 2002 and 2003.Which assets is money moving towards?We have had two major risk-off waves — first in the fourth quarter and now in May, so we think risk appetite will recover and lots of those juicy risk buckets will be revisited and all these high-yielding bonds will make sense in the global context. With the 10-year treasury at 2.10%, people will have a hard time to go to 30-year treasury against this backdrop because they have had a major run.Gold is at a very interesting crossroads. We have been promoting gold for the whole year. It seems that there might be further inflation risks at some stage and gold will benefit. Investors will hold gold against the uncertainties of the cycle. Equity investors should also be fully invested at this stage because equities have some catching up to do.

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