Demonetisation very good for India long term: Geoffrey Dennis, UBS

In a chat with ET Now, Geoffrey Dennis, Head - Global EMs, UBS, says a lot of investors are trying to focus on the long-term opportunities in India.

Edited excerpts


Are people more worried about the emerging market outflows as US yields rise or are they more worried because of uncertainty back home in India because of the demonetisation and the resultant impact on consumption and GDP?

They are concerned about both and keeping their eyes on both these things. There was this major selloff in emerging markets over the last week since the US election. Although things have been stabilising over the last couple of days, there was a second tidal wave of concern running over India because of the demonetisation process. Investors are generally concerned about both. They are trying to assess the damage to the economy in the short term. We certainly think this is very good for India in the long term but the impact in short term have to be ascertained. We are trying to evaluate where major financial markets go, things like treasury bonds and the dollar to get some sort of handle as to where emerging markets go from here. It is a period of quite high uncertainty although I know a lot of our investors here are trying to focus on the long-term opportunities in India itself.

So what is the view currently when it comes to US bonds and the US dollar because given the spike in the dollar index, what it also doing is acutely pressuring emerging market currencies. How long do you think this strength in the US dollar is going to last?

Our forecast is for the end of next year, the 10-year bond is 225 on yields which, of course, is where we were just a couple of days ago. We feel this is a really dramatic shift that we had in the first day or two after the US election result is broadly over and the reason for that frankly is that we think it is going to be extremely hard for the new government to do enough to really stimulate the economy from a fiscal point of view. We have not raised our US growth forecast on the back of election result. We are still at 2.4% for 2017. We think bond yields are not going to go any higher than this over the long term, though they might shoot up in the short term and what that means also is that we are not looking for any material move in the US dollar against major developed market currencies like the euro, etc. We believe the worst of this selloff in EMs is over, although of course there is always the risk that we overshoot in the short term.

So if that is your view, what kind of room does the Fed have in December and over the course of 2017?

We formed our house view even before the election result were declared is that the Fed moves in December, looks pretty close to a done deal. Fed is going to raise rate twice in 2017. Now that might seem somewhat risky for markets and we certainly agree that if the Fed has to get aggressive and inflation picks up significantly, that is going to be a problem. We are focussing on the fact that a year ago when we were heading into a Fed rate hike in December, the markets were anticipating four rate hikes in 2016. Of course, in the end, we are only going to get one presumably. We are looking for more modest pickup next year than a year ago if. The Fed is a little bit of risk but we doubt it is a bigger risk. One to two rates hikes are broadly priced in now. We think a much bigger risk for markets is we get the bond market wrong and if bond yields go sharply higher from here. That will be a major concern.

What is the view then on what Donald Trump’s victory means because the world is rather concerned about what his economic agenda and policies are going to look like? What is your house view because in his inaugural speech he fleetingly talked about the fact that there is going to be a big thrust on infrastructure spend? What more could it mean for the world economy?

I think that is very fair. We are not saying that it is not going to have an effect at all. I think we are just wanting to see exactly what proposals in details the new government will come out with and how easy it will be for them to get some of these proposal through Congress. We assume that in terms of domestic economic policy, there are three things to focus on.

Number one is deregulation which I am sure will mean resending some of the executive orders that President Obama has put in place in the last eight years.

Secondly, we assume they are going to pursue tax reform which presumably means bringing some of this money held in company balance sheets overseas back home and reducing the overall tax rate which is very high in the US. That I think the Republicans in Congress will have no trouble signing on to. We are little bit more sceptical about the infrastructure programme because that is going to be more difficult and people might think to get through Congress because there are still plenty of people in the Republican side who are fiscal hawks and do not want to spend a lot more money.

It is a mixture of those three and obviously we hope that this leads to a big pickup in the US economy going forward. But frankly, there is enough uncertainty about what these policies will be in detail and exactly how easy that will be to implement to make money changes in our forecast right now. So it is a little bit of wait and see frankly.