The dangers people are seeing in terms of frontier sovereign debt have nothing to do with the excellent position of the 24 emerging markets, Teresa C Barger, Co-
founder & CEO, Cartica Capital, tells ET Now.Edited excerpts: The headline that is really hitting us this morning has been the rupee hitting 71 against dollar. What are you making of the emerging market turmoil in both equities as well as currencies? Given that the rupee is at a record low, is it the new normal or could there be some signs of revival in the US dollar? Emerging markets are in balance in terms of current account with neither surplus nor deficit. While debt has gone up, so has GDP. Debt as a percentage of GDP has not gone up and foreign exchange coverage for their debt has gone way up. So, emerging markets are actually poised very well macroeconomically.Part of that is having learnt the lessons of taper tantrum in 2013, I do not see actual emerging markets turmoil. Argentina as a frontier market and it is not an emerging market. Turkey is one but it is a sentiment driven issue there and I see concern for frontier debt markets that somehow has come into the conversation about equity markets. I find it very irritating because the dangers people are seeing in terms of frontier sovereign debt have really nothing to do with the quite excellent position of the 24 emerging markets. Your largest AUM exposure is in India at 32% plus. Is the bipolar move of the index versus the broader markets an irritant or considering you are such a stock-specific, long-only fund, it does not really matter? Not really. We are long-term investors and this spring was difficult in India because there was the budget with long-term capital gains tax and the rebalancing of portfolios which had gotten out of control in smallcaps and midcaps. So, there was a lot of selloff in smallcaps and midcaps. But it has rebalanced quite nicely and the best performing part of our portfolio was India. We are not concerned on that front. Last time when we chatted, I recall you mentioned that high governance and good quality banks is something what you would like. HDFC Bank, RBL, breakaway from these governance problems like ICICI Bank. The alpha chases are sitting very happy looking at the month to date returns because stocks have done great. But somehow the market leadership is now migrating towards value. So, hyper growth, hyper price has been taken over by reasonable growth and reasonable valuations. We are long-term investors and we are very concerned about not taking any reputational or so called headline risk. We would always stick with what we think are high quality management teams and good governance. If you got a high integrity team that has some issues on governance that are fixable, that is fine as well. But we are really going to go for quality and would stick with what the highest integrity, well governed companies. Expensive valuations aside, the going is getting tough. Not only are Eicher sales volumes worrying, but Harley also wants to enter the same segment. You got TVS which is coming out with a bike. Do you think that for Eicher both earnings momentum and PE expansion days are over? You have cut down Eicher stake. First of all, Harley is not going to enter the market for many years and we have had lots of conversations about this. There is also a school of thought that says having another player in mid-sized motorcycle business (250 to 750 cc market) would expand the market for Enfield. It is going to take a long time for Harley to get in there and build up supply chains. Plus, Eicher has spectacular margins. One should be worried about it in five, six, seven, eight years and even then we might find it to be a positive. When there was Coke-Pepsi competition, they both increased the market. The push for Eicher is to have people switch from 100 -150 cc bikes to 500 cc bikes. This will happen with better roads and infrastructure in India.So, investing in infrastructure companies is the way to go. Are you planning to change your position when it comes to TVS? There is a growing fear about that price war initiated by Bajaj Auto. How are you approaching the theme? We have looked at that quite seriously but so far, we are very pleased that other people have not taken them up on the offer to lower their prices. So while that had been a concern for us when the news came out, actually it is more detrimental to Bajaj than it is to the class as whole. While consumption is a favourite theme with most fund managers and not just you, the Indian retail segment is drawing a lot of interest with a lot of M&A buzz. Has it caught your attention yet? Do you want to test waters here? It is very hard to find enough in that segment. We have nothing against it. I do think that e-commerce will come to the fore in India as it has elsewhere, in a fairly big way. Offline retailers have to be very careful and obviously we have had some new news on Flipkart. I do not know if that is going to make a difference to their operations but it has just been a more difficult area in India with far more regulations than other places. We are not really in retailing per se in that many places although we are in restaurant chains and they have done very well for us. Is there any other change that you may have made in your India portfolio in the previous quarter? In India, there are no secrets. Everyone knows exactly what we do as it is the only place in the world. I am sure you all know as soon as we do something. It is high quality, has very good management teams, very good governance and we are really are quite happy with India as we are now. We also like India as a hedge against possible continued policy disruptions coming from the US because it is not that exposed. We like that quite a lot. What about trade war between US and China? Is that an event risk which you think markets are already building in the price? Suddenly one is getting a sense that the problems between Mexico and US is getting sorted out because Donald Trump is not taking such a hard line on Mexico. What is your view on the impact of trade war on markets?There are some risks in it. Today there is a lot of trade news. There was NAFTA news. News on whether Canada could sign it by Friday; news that Trump was going to impose perhaps tariffs on $200 billion of goods from China on September 6 and market had very muted reaction to that. There is going to be really a short-term versus long-term reaction. In the long run, the country that protects itself does more harm to itself than it inflects on its trade partner. According to Merrill Lynch, if the tariffs play out fully and there are retaliations, the US consumer get hurt twice as badly as consumers. In the long run, it is not a very positive thing for the US and people will start to get hurt. For this year, it could be quite difficult and we can see some sentiment reaction on the trade wars.How critical is the Fed stance right now? How are you monitoring it? The Fed chairman Powell has been a little dovish going for gradual rate tightening even though the momentum is strong as far as growth and inflation goes. Absolutely. I think that the markets have already priced in a gradual Fed tightening. It is really a red herring when it comes to the Fed and the emerging markets. We do not think that Fed tightening has led to all this currency volatility in the emerging markets because in other tightening cycles, the emerging markets have done fine especially when they already know that the US should hike for the right reasons, that the economy is running hot and inflation is on the horizon.Actually, the currency volatility in the EMs has reached a peak right now and in past cycles whenever it has peaked like this, it has come down and moderated in the following weeks. Since we are at a peak point, we expect to see moderation come through. I also personally expect that it the medium term, we will see the dollar weaken. In the last two weeks, the dollar has weakened to about 2%.In the past, the warning signs of US currency moderation have been the exchange with the Israeli Shekel and the Swiss Franc. In fact, both of those in the last two weeks had gained 2.85%. They are both on-target there and have been harbingers of what is to come in the rest of the market. We are eagerly waiting to see whether mid August actually has been a turning point for the US dollar. Do you worry at all as to what could kill the longest running US bull run? Many have wondered how solid is the story in FAANG stocks and what is going to happen if they were to correct. I do worry about that. The US markets are priced to perfection and that means any number of small triggers could mean that the US stock markets will start to fall back to earth. For example, second quarter growth was at 4.5% which is very much above potential and not sustainable. If expected growth in the coming quarters is significantly less or if consumer spending is significantly less, that could derail the US stocks. If you have negative revisions in earnings per share, that could derail stocks. If inflation popped up unexpectedly, that would derail stocks. A lot of things can happen. And we are seeing a lot fermenting in the base as well.
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