deutsche bank: Lot of interest in India with earnings seen coming back: Christian Nolting, CIO, Deutsche Bank

Globally investors have been talking about the effectiveness of easy monetary policies. You have also questioned it in your recent report.


After the financial crisis, central banks have done a lot of work, especially with quantitative easing, among other measures they have taken as well. That has led eventually to a massive amount of QE globally which we think was quite successful. But we are now at a stage where, in general, globally, interest rates as a consequence of QE are low or even negative. The question is about the efficiency of the tools of a central bank, not that the central bank does not have enough tools, they can do much more if they want to. But the question is, is it as effective as it has been before? It was a clear driver for markets. We probably need to live with that lowinterest-rate environment for quite some time. Central banks will focus much more on fiscal policy because of the low effectiveness of the tool. In the emerging market space there is still some room for manoeuvre for central banks. If you look at the Fed, Japan or ECB, that’s where we see a lot more focus on fiscal policy. That’s why we question the central banks not in their substance, not in their tools, but the efficiency of tools. There are other ways of course, to implement. India also did Operation Twist. The alternative is regarding fiscal policy. Fiscal policy means the debt levels would be even higher. As a consequence we will need to live with this low interest rate environment for quite some time.

So, where is the Fed’s policy headed?


Our base forecast is that we don’t see a change this year so no rate cut. I think what would be interesting is that you see the first quarter. I don’t think there’s so much issue with coronavirus. The implications for the economy will be much larger in China and other countries, not so much in the US. If the Fed were to cut, that could be after if we get a weak first quarter. Our base case is for no rate cuts because of elections this year and historically the Fed has not moved rates closer to the elections because they don’t want to be seen as influencing the election results.

We do forecast the US economy to weaken a little bit from 2.2% last year to 1.6%. But I don’t think the Fed wants to use all their firepower right now. We don’t think we will go into recession in the US, so there’s probably no need for the Fed to cut further.

Do you see a sharp slowdown in China’s growth because of coronavirus?


In China there is substantial impact. Business is not where it would normally be. If you look at China, we think it’s probably 1.2% less growth this year. But on the other hand, there will be measures from the Chinese government.

Are investors seeing India as a better investment option as China is battling lower growth after coronavirus? How does India stand within EMs?


We have reduced equities. But the plan clearly is to reinvest that money into emerging markets, especially Asia, especially China and India. We need to learn more about the coronavirus. But I’m not in the camp that says this is the end of the world. Many investors have been waiting for some correction in China. In the longer term, it’s an opportunity. So we have held back our investments into the emerging markets for the time being, but we think because this will be in the news for probably weeks. We have reduced equities to underweight. But it doesn’t change the whole picture. On India, what is interesting from our point of view is you will probably see a bit higher growth this year than last year. Growth was coming down quite substantially in India, but you also had the corporate tax cuts last year, and they should also pay off. And from that perspective, we do expect a bit higher growth for India, which could make India even more interesting to international investors. We do see some flows into India as well. Even last year, we saw a massive amount of FPI inflows at around $18 billion and it was higher than what went to other emerging markets, especially in Asia. There is a lot of interest coming into India mainly because earnings growth finally seems to be coming back, largely because of corporate tax cuts. We saw the same thing in the US — Trump cut taxes and we saw earnings go up there in 2017-18. So I would expect the same in India as well, which is the intention of these tax cuts.

Will 2020 be a better year for markets than 2019?


Not necessarily. We have seen Iran issues at the beginning of the year and we have coronavirus. Other risks are the US elections and in Europe, there are still lots of discussions about Brexit. There is no agreement between the European Union and the UK about trade. The UK economy is not in the best state, it could go into recession. In general, we do expect lower growth this year which could lead to higher volatility in the markets. So to compare with 2019 it will probably not be the same nice year. But it doesn’t need to be bad because we don’t forecast a recession.

Which are the asset classes you prefer most at this juncture?


We still like equities, but we don’t expect the same return as in 2019. The return to be expected this year is 5-7% which is slightly below average. On the fixed income side, we need to live with low or negative returns.