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Neutral on EMs; pace of reform key for India: George Hoguet

George Hoguet, MD, Senior Portfolio Manager, State Street Global Advisors is neutral on emerging markets (EMs) in the wake on geopolitical risks. In an interview with CNBC-TV18’s Shereen Bhan, Hoguet says though he is constructive on India, but adds that pace of structural reforms remains the key.

Also Read: FIIs upbeat on India; bet on cyclicals, banks, says FT’s Bindal

Below is the transcript of George Hoguet’s interview with CNBC-TV18’s Shereen Bhan. For the complete interview watch the accompanying video

Q: What is your stance on India, do you continue to be neutral on emerging markets and specifically on India?

A: We are entering a more difficult period in the global capital markets. As you know volatility has been quite low and we are neutral emerging markets primarily because of the terrific geopolitical risks in the world and the prospect of a oil shock or expanding conflict in Ukraine. So, within emerging markets we are constructive on India, but the devil is in the details in terms of the pace of structural reforms.

Q: What would get you to change that position leave aside the external factors like geopolitical risks etc but have you seen enough in terms of at least the intent as far as addressing the structural reforms are concerned that may change your position on India?

A: The Modi administration is in its very first months and it will take time for these reforms to unfold. One thing that is important is a reduction in inflation and dealing significantly with the twin deficits. So, the IMF outlines in article 4 a number of measures that could be under taken, deal with fuel subsidies and promotion of foreign investment. In that sense the visit of Modi to the United States is very constructive because we may consider this like the changes that were undertaken in the Reagan-Thatcher years in terms of a fundamental restructuring of the economy.

Q: Speaking of the twin deficits we have actually seen the government meet its fiscal deficit target and it looks like it will meet the fiscal deficit target for the next year as well. The current account deficit has come down quite significantly, we have actually seen global crude prices come off sharply which has given the government a fiscal cushion. In India the diesel under recoveries or diesel losses have been wiped out, would that make you a little more confident about investing in India?

A: It would, but we have to recognise that capital market movements can be very violent and we saw that last May with the so called taper tantrum. So, if there is a change in expectations with regards to the pace of Fed normalisation, India could be affected. As you know governor Rajan in his remarks earlier in the year talked about the importance of coordination of monetary policies or at least the Federal Reserve taking into account the impact on emerging markets.

Q: If the Fed were to start hiking rates and the anticipation is that it will perhaps be in Q3 of 2015, do you believe that that is going to have a significant impact on fund flows into emerging markets or do you believe that this is factored in just like the asset purchase winding down because this is a move now that’s being expected?

A: Investors are bringing it forward given the strength of the US economy the date of the first tightening. We think it is actually going to be in Q2, that is the first point. The second point is that the prospect of a policy mistake clearly exists in global capital markets given the massive intervention that we have seen by central banks.

Nobody expects a 94-95 type sell-off, but if you look at emerging markets as a whole they sell at about 10 times 12 months forward earnings versus about 14.5-15 times for global markets. People are concerned that prospectively there could be a spike in volatility which would negatively impact emerging markets including India.


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