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The cautiousness exhibited by Indian investors is both good and healthy, says Howard Williams , managing director and the head of the global equities team of JP Morgan Asset Management and JF Asset Management. The critical mass of the emerging middle class will ensure sustainable growth in India , he tellsET . He feels that although quantitative easing will increase asset prices in the near-term, no one can say for certain what its long-term consequences will be.
How do you see the Indian market?
All the local investors I have met seem to suggest that the market is very expensive. It doesn’t look like a bubble to me. When you need to worry is when your taxi driver tells you how many shares he has got and where the market is going. I don’t see any of that. Indians are far more cautious about their own markets than they should be. And that’s good. That’s healthy. It’s not a cheap market. But given the profitability ahead, why should it be a cheap market? Also people, locally, are underestimating the critical mass of the emerging middle class, where Mrs Singh has a washing machine, so Mrs Singh’s neighbour also wants a washing machine. And that’s why I think growth can be sustainable.
What do you think of the second round of quantitative easing (QE II)?
The American economy is stalled. It had a heart attack. The main problem is that they have a huge output gap and they have got huge unemployment. After every recession in the United States, it has taken longer to restore levels of prior employment. Take the famous jobless recovery of 2001. It took four years to get back to the level of employment before the recession. In the current recession, the labour shake-out has been a lot more severe, which is why you have got a 25-year-old record unemployment number in the US. Politicians don’t want to go into the next election with a 25-year record. And that’s not the American dream. The American dream is not 10% unemployment.
So what is it they are trying to achieve through QE II?
The impact of QE II is designed to head off deflationary price expectations. You don’t want to enter a situation where the aggregate price level keeps falling and people feel they should defer purchases of goods because they expect goods to be cheaper next year. This suppresses aggregate demand. I think Ben Bernanke gets that. He realises that there are no inflationary pressures in the system because of this output gap. So he can print money. Call it quantitative easing, but it is printing money. Also if QE II doesn’t work they will try QE III and QE IV because they need to stimulate the economy.
What will be the near-term effects?
The near-term effects should be to raise asset prices. The problem is that the major asset price that matters is the housing market in America. And that remains oversupplied.
But will $600 billion be enough to address the problem?
No one knows. Ben Bernanke does not know. If it was as easy as printing money, Zimbabwe would be a very rich country. You can’t just print money without consequences. I think the Fed’s judgement is that as soon as they see growth restored, as soon as they can see incipient inflationary pressures in the economy, they can mobilise interest rates and withdraw that liquidity.
Is Ben Bernanke getting desperate?
Many people would say yes. But there are no other levers to pull. You have pulled the fiscal lever. It would be interesting to see if the fiscal tax cuts will be rolled again by the Obama administration.
The last time the US printed money (QE I), a lot of that money leaked to various parts of the world through the dollar carry trade. Has that started to happen again?
Yeah. Bernanke would like it to leak to the real estate market. That may happen. But the more near-term effect seems to be that it’s leaking to other high-yielding currencies like emerging market bonds, emerging market equities. This will overheat asset markets, be it real estate prices in Brazil or Mumbai or the equity markets for that matter. The normal policy response to this is raise interest rates. If you raise interest rates, you widen the carry trade’s perverse impact. The high interest rates may slow domestic demand but attract more capital. So you end up with a more inflationary asset bubble. That’s a genuine challenge for policy makers today.
Where are we really headed?
I don’t think anyone really knows the ultimate consequences of QE I or QE II. You can understand the near-term impacts on asset prices, but the consequences of that down the road are unknown.
What is your view on gold?
In our natural resources portfolio we have had a lot of gold exposure through the financial crisis. We hold gold securities.
You mean stocks of gold mining companies?
Yes. Gold mining companies. We don’t hold physical gold in the funds that we run. We continue to run gold because this whole debate over the intrinsic value of paper currency is going to continue. The changing landscape of gold ownership has been phenomenal. Ten years ago global gold demand was all in the form of jewellery. We all know where that sold. The net investment demand was zero. Now the investment demand is almost one-third of gold demand. Those are the Gold ETFs.
The other missing piece from the gold demand is central banks. You may find places like China and other sovereign entities may not want to hold dollars anymore. They may want to hold some real assets. You might well end up with central banks switching to gold.
If you were a central bank which currency would you like? Would you want to invest in the Euro, given all the Euro zone issues? Do you invest in the Yen? Zero interest rates. Half the population of Japan by 2020 is going to be over 65. Do you want to own the dollar, when they have said that they want to depreciate the dollar? And you can’t own Chinese Yuan. So what are you going to own?
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