WF: One section of market participants is cheering signs of visible global growth while others fret about implications of calibrated liquidity withdrawal by Central Banks which has been the biggest support for markets this decade. Should we be optimistic or worried about global markets now?
Bob Baur: We should likely be optimistic about global growth as the world economy returns to some semblance of normal after a near decade of deflation, slow growth, fear of relapse and series of consecutive financial crises around the world. At the same time, one should brace for more volatility in financial markets as monetary policy returns to normal. The world economy is robust; stock markets have been surging higher, yet long-term interest rates stay at depression-era lows. If the latter changes and long-term interest rates rise, long-term financial returns may be hard to find.
WF: The US bull market is now over 8 years old, profitability numbers are at peak levels, valuations are at cycle highs and FAANG stocks - the leaders of this market - are at 100+ PE ratios: all classic signs of potential market topping. Is this too pessimistic a view on US markets or should one be worried about this bull market coming to an end?
Bob Baur: Higher long-term interest rates will be a drag on stock markets as the ultra-low rates pushed by central banks have been a driving force behind the long stock market rally. It's likely that the volatility of the large, growth tech company stocks the last few days is the beginning of that type of volatility. Since they have been the leaders of the rally, that does not bode well for a continued strong equity uptrend. We expect that higher long-term interest rates will likely bring a significant stock market correction. That would slow central banks' return-to-normal actions and bring long-term rates back down again helping stocks to rally once more.
WF: Some market observers have been drawing attention to global debt levels which are now at historic highs, with several countries' debt as % to GDP at significantly higher than 100% levels. China is believed to lead this pack at 300%. What implications does this elevated debt level have on economies and markets?
Bob Baur: High debt levels restrict future growth. Much of China's and indeed the world's growth over the past many years have been boosted by rising debt levels. Borrowing for current consumption pulls growth from the future making current growth faster but future growth slower as that debt is paid back. It also makes the financial system more fragile and prone to crises.
WF: What do you make of the Bitcoin mania - is it the current avatar of the famed tulip mania or the beginning of a new paradigm that many have not yet fully grasped?
Bob Baur: I don't think we know the answer to that yet. So, far, its stratospheric rise appears to be similar to the tulip mania, especially since it has captured the imagination of people outside the investment mainstream. It likely shows the fear that some have of the inflationary impact of central bank manipulation of currencies and of monetization of country debt. The distributed ledger technology at the root of the block chain record-keeping system may be the best part to come out of cyber currencies.
WF: How do you read the emerging markets economic cycle now? Where in the cycle are EMs now?
Bob Baur: It's likely that emerging markets in general are toward the end of their investment cycle after the long investment boom of the 2000s. However, there are differences within those countries. Brazil, Russia and some other commodity producing countries may have already been through the down part of their cycle. Perhaps India would also fall into that category as it has been through some painful times because of the reforms and restructuring of the last couple of years. We see infrastructure projects making progress on the ground and select businesses looking to doing capital expenditure. One has to differentiate between countries as emerging markets cannot be thought of as all of one group.
WF: Indian markets continue to wait impatiently for domestic economic growth to pick up smartly and for corporate earnings to accelerate. How do you view the rather languid pace of earnings momentum in India and the road ahead for GDP and corporate profits growth?
Bob Baur: It's likely that India is on the way to somewhat faster growth and a pickup in profits now that some of the painful restructuring and reforms have been accomplished. Bank recapitalization, the GST change and demonetization have generally been positive moves that has held back current growth from uncertainty, but have been positive for the long-term. The ratings upgrade by Moody's and the rise in World Bank's business rankings have been positives.
WF: Market participants worry about potential deterioration in India's macro position, with fiscal deficit set to widen on account of a higher oil bill, revenue slippages and continued robust spending to jump start economic growth. How do you read our macro situation going forward?
Bob Baur: Those surely are significant and difficult issues, both a fiscal and trade deficit. However, demonetization will hopefully bring more transactions into the visibility and positively impact tax collections. Also, the faster potential growth because of the reforms will help the fiscal deficit from getting too large.
WF: Are global commodities now in a bull market? Are oil prices unlikely to slip back to the $40s? Should India brace for oil in the $60s - 80s range?
Bob Baur: We'd guess this is not a new bull market in commodities and that oil will stay in a $45 to $60 or so range. US shale oil output is the new marginal oil producer with the ability to expand and contract oil production to help keep oil prices range-bound. Commodity prices got too cheap in late 2015 and early 2016 when demand had slumped and the US dollar was soaring and China's growth has slowed substantially. The rebound has come from the robust world economic expansion currently underway; but since the global economy is likely now at peak momentum, we'd guess commodity prices are close to peak levels. We expect that 2018 should be a year of deceleration and a peak in commodity prices.
The views expressed and information herein are independent views of the interviewee and for informative purpose only and under no circumstances should be construed as an opinion or Investment advice. The information contained herein is not intended to be an offer to seek solicitation for purchase or sale of any financial product or instrument. Investment involves risk.
As an investor you are advised to conduct your own verification and consult your own financial and tax advisor before investing. The Sponsor, Trustee, AMC, Mutual Fund, their directors, officers or their employees shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages arising out of the information contained herein.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Share this article