NDTV Profit’s Namrata Brar and Ashutosh Sharma of spoke with Warren Hogan, head of market economics and strategy at ANZ Investment Bank, on July 2, 2009. Hogan spoke about his outlook on global equities and the prospect of the Asian economy, particularly India.
Namrata: Do you believe that on global equities first, this move of digestion or risk reduction is over? Now, people are looking at relative value trades and that’s where the call is—it’s not going to be simply a one-way move which is largely now discounted in the March rally.
Warren Hogan: Well, I think the outlook from here is a lot more difficult than it has been. There was a lot of momentum behind the moves in the last three months and I actually think what we saw there was the markets pricing out a depression for the global economy and what we have got now is that the equity markets factoring in a global recession. So, I think we can be quite positive on the equities in the short term which continues to see further signs of green shoots of stabilization over the few months ahead. I don’t think the equities are pricing in that rosier outlook. That being said, there’s not going to be a one-way bet and there will be greater distinction in certain sectors and geographic regions.
Namrata: What happens in terms of dollar trade right now. You know you have got China again saying that it will bring up the issue of a reserve currency in the G-8, which is due next week and again dollar has repercussions on commodities, oil prices in particular.
Warren Hogan: Yes, the US dollar has been showing very positive signs in the past few weeks. But any talk, particularly out of China, over the currency issue, makes the markets very nervous.
Ashutosh: But as far as the US dollar is concerned, do you think commodities may see a more upside from hereon?
Warren Hogan: Well, I think that dollar weakness, that’s the case but the underlying drive is of commodities prices, not just by the improvement in growth expectations in recent months, and obviously the very strong performances from key large Asian economies and I think that outlook of Asia in particular is going to be critical to the course of commodity prices. I don’t think the US dollar would be moving around enough to have a substantial effect on commodities. It will have a secondary effect. I think the greatest risk to the commodity rally that we are saying is a loss of momentum in Asia, particularly China.
Ashutosh: I would like to digress the topic at hand and talk about the spate of equity issuances that have been coming up and reports also suggest that the IPO market, in Asia particularly, may actually see a bit of a revival. Here in India itself we have seen a couple of IPOs been announced and have received a very strong response. What’s the outlook on the primary market front? Do you think that the overseas investors flush with liquidity could actually be a case where an IPO markets may still see a lot of revival as the year progresses?
Warren Hogan: We have certainly seen a lot of companies raising equity, particularly in Australia. We have seen a very strong six months of equity risings in Australia, and I think to stay in the Australian market, which in context to global economy, is very small, we have seen something like 10-15 per cent of global equity raisings in this market. It tells us that globally with equity ways quite depressed and plenty of cash on the sidelines, investors are willing to come into the primary markets. I think as long as the underlying stability of global markets remains and the equities are performing reasonably well, then I think the IPO market could do well over the next three months.
Namrata: Are you a bull on India and do you believe that with the victory catalyst with us now and expectations of big reforms on July 6 in the Union Budget coming up on Monday, many investors are actually preferring India to China? Because, one, we have the hopes of policy reforms and second, we don’t have the export dependency.
Warren Hogan: Yes they are very important. I think that’s kind of going to become more and more of focusing global markets, if it is all ready. The long-term potential of many economies across Asia, in particular India, is some of the broadest outlooks of any economies in the world. It’s no doubt any way in my mind that the Asian economy in general is going to lead the world economy out of this downturn. It’s not clear whether that’s going to be in the next twelve months or the next few years, but I’m bull on India and I think that although it’s going to be a very rough ride for one year or so, the medium and long-term prospects are fantastic.
Namrata: But how would you put India? Would you say that India will lead the next bull cycle versus China. China is actually going to be a bit of a problem spot because there could be an asset bubble with a massive amount of manufacturing in capacity creation, which has taken place over the last several years and with no end consumers.
Warren Hogan: Yes, I do think that’s a big issue for China and I also do think that this issue is being addressed that they need to focus on creating a domestic demand and there is no doubt that the major export driver over the last ten years for that economy has been the Western consumer, in particular the US consumer. And we are not going to see the US consumer or the western consumer return to consumption level that we saw early in this decade.
So for China the priority is getting a domestic demand and doing that not for investment in infrastructure. But they need to get consumption up. And that’s going to take some time. That’s not something one cannot do in a year or two years’ time but in a number of years. So there are some challenges ahead for China, but that said, it’s an economy that is showing incredible durability for such a large economy and I also would be bullish on China on a five- to ten-year basis.