The journey of global markets from their March lows has been phenomenal and awe-inspiring. At the onset of the pandemic, nobody could have imagined such a ferocious recovery. Unprecedented policy responses, especially in the developed world, helped the global economy navigate through hot waters. Technological adaptations spearheaded. And hopes of a vaccine are now providing an even greater cushion against future uncertainties.
Have markets already factored in all these positives? How does the geo-political and macro-environment look globally? How much financial ammunition is still left with the governments and Central Banks? Has the outlook of various asset classes changed dramatically?
Investors are asking many such questions at this juncture.
On this backdrop we decided to evaluate the macroeconomic landscape and we thought it was the right time to touch base with Mr Ritesh Jain again. If you remember, we had interviewed him in March 2020. (click here to read the previous interview).
In his investing career of over 20 years, Ritesh Jain assumed senior roles which includes CIO—BNP Paribas Mutual Fund and Tata Mutual Fund—wherein he managed USD 1.2 billion and USD 6.0 billion, respectively.
Amongst many national and international awards he won as a fund manager, CRISIL CNBC TV18 Award, Business World Debt Fund Manager of the Year award in 2011 and Lipper Best Bond Fund of the year (4 years in a row) are noteworthy.
A blogger himself (http://worldoutofwhack.com/), Mr Jain is now a trend watcher and global macro investor. His mantra is to Make sense out of chaos.
As always, he has presented his candid views in a freewheeling conversation with Ventura Securities. We hope you might glean some important takeaways from this conversation for further assessment at your end.
An important disclosure: Views expressed herein are personal and those of the interviewee only and under no circumstances should be construed as those of or endorsed by Ventura Securities.
Here we go!
1. We spoke to you about 8 months ago, i.e. when the world was grappling with the uncertainty of the coronavirus pandemic. Do you think the global economy is better off today when it comes to handling the economic uncertainty related to pandemic? Or do you reckon we might be running out of fuel, considering the massive stimulus packages announced already by the governments and central banks?
I think we are in what I call a “Brave new world” where monetary and fiscal policy will be merged. Government and government intervention in the economy will become bigger as politicians have got control of money supply. Central Bankers will find that their independence will get curbed by governments and this will give rise to a centrally planned economy.
We will also get a new policy framework where the government will decide winners and losers across industries. There is so much debt in the world and the only way to reduce the debt is by “inflating” away the debt. Therefore, I believe that we will continue to see authorities doing creative things including MMT and yield curve targeting to postpone the day of reckoning.
2. How do you read Fed Chair Jerome Powell’s comments on the economic recovery? He recently remarked, “We’re recovering, but to a different economy — and it will be one that is more leveraged to technology.” Moreover, he also voiced a caution with regards to the potential unemployment situation, especially among women.
The Fed has taken on a new mandate of focusing more on employment generation and less on inflation. It is like they are trying to position the Fed to play a role in social justice.
This is a new Fed and we should be paying attention to what they say because Central Bank liquidity is the only game in town. This new employment mandate is much more inclusive than the previous one and it means that the Fed will be looking at recovery in more employment variables before deciding to tighten monetary policy.
3. Will the change in the administration in the world’s largest economy bring ashore new optimism or oodles of reality to stock markets?
I think under the Biden administration we will see socialistic policies, higher allocation to green energy, more unionization, increase in Government debt financed by the Fed and this is not good for the US or the US Dollar in the long term. This certainly is a cause of optimism for Emerging markets and real assets, which do well when we see depreciation in the US Dollar.
4. Do you find any disconnect between inflation and interest rates, on the global landscape and also in India?
Yes, interest rates are lower than inflation practically everywhere in the world (except China). This is known as negative real rates. India probably has the highest negative real rates among major economies. Interest rates have been kept artificially lower by central banks because they believe that lower rates can lead to higher economic growth as lower rates will lead to higher availability of risk capital, which is a necessary ingredient for bringing back growth after the Covid slump. This is effectively a tax on savers.
5. Low interest rates seem to be causing a spurt in housing sales. Do you agree? Or you think more subtle trends are at play? In that case, what’s more appealing; real estate Vs real estate companies Vs mortgage finance companies?
Yes, negative real rates always lead to money moving into real assets, including precious metals and real estate. I don’t think there is a better environment than today to be a leveraged borrower to invest in real estate. I think affordable real estate with borrowings is the best way to play low real interest rates and in the coming years I believe we will see an “affordable” real estate bubble simply because of a combination of government policy and negative real rates.
6. In March, you had predicted that the gold prices might climb to Rs 1 lakh in the next 3-5 years. Between March and August gold rallied almost 25%-30%; but since then the rally has tapered off a bit. Do you feel this is just a pause or at max a time correction? or, with the news of a vaccine gathering steam, will the rally in gold be capped for now?
This is just a pause in a bull market which is just halfway to its destination. It is good for gold to correct and work off the excessive optimism which was built around precious metals. I think gold is just going through a time correction and base building, in the near term. Some of the gold allocation has been going to crypto currencies, which are also known as “digital gold”.
The longer is the time correction, the bigger is the breakout. Vaccine news just increases the duration of time correction. My basic premise of holding real assets is negative real rates. We are at -0.80% of real rates as of now and in the next 2-3 years we will reach -3% of real rates.
Negative real rates are the best way to reduce debt/GDP in an indebted economy and this tool was last used after WW2, to rebuild the economy. I expect to see $2300 by the middle of next year and on its way to $3000 in next 2-3 years.
7. Does the Atma Nirbhar Bharat programme offer attractive investing opportunities? And, will three rounds of economic stimulus between May 2020 and November 2020 set the ball rolling for India Inc?
We have a great opportunity as supply chains are already shifting from China. According to a survey of 2000 Executives in North America, majority are thinking or already in the process of shifting their supply chain to Mexico, Vietnam or India. The opportunity is already there, and Indian authorities just need to be an enabler for Atma Nirbhar Bharat. The easiest opportunity is in the mobile phone ecosystem, which will not only reduce India’s import bill but will also provide large employment opportunities.
8. On the backdrop of the pandemic, the government has time and again emphasized on supporting MSMEs. Do you think, Indian MSMEs are well-placed to counter industry giants?
India is now an oligopoly and most MSME do not have professional management to navigate the changing landscape, hence government support in the form of tax breaks is not going to energize this sector.
9. Recovery Vs disruption; what will best describe economic trends in the calendar year 2021? And what are the factors you would be keen to watch in 2021?
In 2021 we will see centrally planned economies. Policies for redistribution of wealth, more government intervention and social riots. Technological disruption will not slow down but will face stiff regulation from the authorities who are worried about its impact on unemployment.
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