Not US market, EMs falling due to domestic policies: Andrew Freris, Ecognosis Advisory
- US markets have fallen because of rising interest rates. It’s not a correction.
- To think that we are all driven by the Americans is basically wrong.
- The Modi administration is not exactly hands off from RBI.
What do you make of the global markets? Is the situation as bad as in 2013?
Not the slightest. Actually it is absolutely amazing. We all look at the same data and we come to completely different conclusions. The Fed has raised interest rates seven times and of course the markets are reacting with a quite degree of delay because the Fed started hiking from the point of zero. Now that it is reaching nearly 3%, it is getting much more serious because the Fed funds may soon very well be matching the 10-year yields. Of course this leads to a repricing, I do not call it a correction, correction is nonsense. I will never use that stupid word. No, the markets have fallen because the interest rates are rising.
Now of course even Trump has got on into the act and he realised that the reason why prices are falling. He is saying that it is not his fault, although of course he said it was his doing that the stock markets were up. And, of course he is blaming the Fed. To a great extent, the American markets are reacting to higher interest rates, terribly simple 101 economics. Am I surprised? Not in the slightest.
Whenever interest rates are hiked, outflows from emerging markets are seen. Would it be particularly high this time?
Not really, because even if you look at the same emerging markets, all of them have got very different performances on their stock market. India has got possibly the highest GDP growth rate and it has got a very poor market, so does China. In other words, what drives those markets are not American interest rates (which do not help), but domestic cycles as well as domestic policies.
In India, the Reserve Bank of India is now on a hiking range. I am not surprised that this is going to affect negatively the markets. China has had the worst equity market in Asia for nearly two years for very specific reasons, some technical, some from domestic policies and some of them coupled with the behaviour of the renminbi and the opening up of the capital markets.
Now, if the Dow goes down by 800 points, everybody is going to say, well, it does not really matter. But to think that we are all driven by the Americans is basically wrong. It does not help but it is basically wrong.
You feel that this entire rout that we are seeing is primarily driven by the interest rate movements. But why did we see the crash overnight?
I will have to answer it with another question. We did not see the crash in December 15 when the Fed started to hike. Why did we not see it? It took two years for this to go through because we started from an extremely low base. If interest rates are zero and they go up to a quarter of a base point, I am not going to die. But now that the interest rates are pushing rapidly to 3%, that changes it. So the answer is yes a delayed reaction.
I am not saying that interest rate was the only thing but the Fed is very adamant and they have already increased rates seven times and they say we are going to increase perhaps two or three more times. If you want any further confirmation that this frightens the market, look at the reaction of the President of the United States calling his central bank crazy! Not nice.
Coming to India, would we see an out of turn rate hike going forward or is it best to have the status quo policy and see what other central banks are doing?
People in glass houses should not be throwing stones. The Modi administration is not exactly hands off from the Reserve Bank of India, including what is basically a very political appointment with the governor who is much more in the pocket of the administration than the previous one was. Despite that, the RBI hiked rates. I imagine they are trying to be both God and the devil and of course, the continuous pressure on the rupee has not helped. Of course, it would need a lot of hikes before this is brought under control. The government is now trying to impose import duties which I think it is absolutely stupid. Perhaps, it does not set any wrong example because Americans are doing it but the Americans are not concerned about their current account, they are concerned about their domestic industry.
In India, we are looking at current account deficit and the impact it might have and also the concern that each time something happens, people leave India, which is not quite or necessarily true. I am afraid my answer is inactivity because I imagine they cannot be doing both things at the same time. Heavy intervention to put a ceiling on the movement of rupee would have been the equivalent of an increase in interest rates.
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