India is at top of my list… next year will be better : Brian Jacobson, Wells Fargo

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Brian Jacobson, Wells FargoThe year 2017 could see emerging markets outperform developed markets, and India would be the top pick, said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management. The dollar strength that is worrying emerging markets currently might reverse as the US Federal Reserve could be more patient in raising rates than what is being expected right now, said Wisconsin-based Jacobsen in an interview to Sanam Mirchandani.

Edited Excerpts:

Do you think the US Federal Reserve will be able to carry out the three projected rate hikes in 2017?

The Fed is may be getting a little too excited about the prospect of fiscal stimulus in the US fuelling a further rise in inflation. I don’t think any fiscal stimulus that we might get in 2017 is going to move the needle too much on inflation. The Fed might have to bring that (rate hike projection) down to two times in 2017.

If the dollar continues to strengthen, will the outflows from EMs to the US accelerate?

The dollar is likely to strengthen in the near term as people try to grapple with how aggressive the Fed might actually be in 2017.But for all of the next year we could see a bit of dollar weakness. The dollar strength should likely reverse as the Fed proves to be more patient than what they are initially letting on. In the short term, EMs could come under some pressure. Also, commodity prices seem to have stabilised at slightly higher level and that should support many EMs (emerging markets). The valuations in EMs are still quite attractive. In 2017, we could see EMs outperform developed markets.

Is India still among the top emerging market destinations for you?

India is at the top of my list. Mexico is second, followed by China. The next year will be better for India. This year has been pretty much a washout. By the end of 2017, we will perhaps quip the 9,100 mark, if not move towards 9,400 on the BSE 100. India is going to continue to benefit from improved economic growth in the US and Europe. Prime Minister Narendra Modi is going to continue to push his Make in India programme which should be beneficial to domestic manufacturers and the domestic economy.

What are your thoughts on the government’s demonetisation move?

For the overall economy, it is likely going to have a transitory effect, most likely to be felt in the fourth quarter of 2016. One of the things I am somewhat cautious about is what the RBI’s response is going to be. I was expecting that the RBI will cut rates to try to provide monetary stimulus to offset the monetary contraction from the demonetisation, but it decided not to do that. If we see the economic data continues to contract, and the RBI doesn’t take action, then I would change my outlook on India pretty quickly.

What are the key risks for Indian markets going ahead?

If the economic data deteriorates further and the RBI isn’t providing some additional monetary stimulus, I would see that as a negative signal.

What are the key investment bets that you would look at in India and what would you avoid?

The demonetisation has had a big impact but it was temporary and we should see a rebound in the consumption spending. That’s probably where I would look for immediate rebound. In the longer term, I am more interested in looking at improvement in infrastructure, and also improvement in the manufacturing sector. I am wary of investing in financials in EMs mainly because of the states’ involvement. There are also non-performing loan issues. I am not sure if there has actually been a coherent plan laid out to deal with them and I don’t think they are going away any time soon.

Will the outperformance of metals and mining companies continue in 2017?

We have seen a huge rebound in the metals and mining space but it has rebounded much further and faster than expected. I cannot help but think that they have overshot on the upside. There has been a lot of speculative money going in there and I am just not comfortable with that type of set-up going into 2017. Just as quickly as they rose, they can fall.

Could we see any political or economic risks from Europe in 2017?

There are elections scheduled in France and Germany. There are a number of others as well. So, there is that political risk. But these are all well priced into the markets. The fact that even though the no vote came through in the Italian referendum and the market rebounded from there suggests that a lot of these risks do not really represent that much of a market risk any more. Also, even if we did see an adverse move in the French election, like Marine Le Pen’s party win or Alternative for Deutschland doing well in the German elections, I do not the market is going to react all that negatively to those events. A lot of people are going into all this assuming the worst. If things don’t turn out that badly, you could see a decent rebound in the market.

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SOURCEEconomic Times
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