Oil has queered the pitch for economies the world over, particularly those deficient in the commodity, feels Nick Toovey, the regional head of equity, Asia Pacific, ING Investment Management.
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Toovey, now based in Hong Kong, worked at Merrill Lynch Investment Managers in Singapore, where he held the positions of chief investment officer and then chief operating officer for Asia Pacific before joining ING in 2003.
He is a chartered financial analyst and studied at the University of Canterbury, New Zealand. Toovey was in Mumbai recently, making the case for Asia in an investment marathon organised by ING, where DNA Money's N Sundaresha Subramanian caught up with him. Excerpts:
How does oil flaring to $ 150 or $ 200 affect the various growth drivers that have made Asia the investors' favourite around the world?
Every country in the MSCI Asia-ex Japan is an importer of oil. Therefore, higher oil imports have a negative impact on growth. The impact is more severe on countries like India and China, which are subsidising it. As a result, demand continues to remain high. Either the government or the oil companies, one of them loses.
Why are foreign investors shunning India?
We saw significant rise in global risk aversion as a result of the troubles in the US financial sector. This has led to flow of funds out of emerging markets. What is happening in Indian stock market is not because of the possible earnings slowdown, but because of the external factors.
We are in an interesting economic environment where economies are slowing down everywhere. It's 0% in the US; slow to very slow in Europe; in emerging markets, stronger but slowing. Most places we are seeing a higher inflation and higher interest rates scenario. In developed markets, we will be cautious. We prefer markets like Asia Pacific and Latin America, where we see higher levels of growth.
Both are interesting stories – partly similar, partly different. In Asia pacific, the large domestic economies are net importers of oil and commodities. Higher oil prices and commodity prices, therefore, is a headwind for these economies. In contrast, most LATAM countries are exporters. Therefore, we are now seeing investors diversifying away from energy necessity to energy richness.
Are you seeing recessionary pressures hitting India?
We are not a seeing a recession, but there could be a slowdown in growth. But, not a steep one. Seven percent is not bad at all - seven, eight, nine are all good numbers. Even if growth slows down to 7%, India will still attract investors.
I don't see it going down below that as structurally, these economies have a lot of scope for development. The growth rates we see in the developed world is because they have reached a stage of saturation. Unless that happens with India, growth rates will remain high.
How do you expect the foreign flows to be as they have turned negative this year?
The environment has become challenging. As governments across the world start fighting inflation, we could see an increase in interest rates. The US has already indicated that rates could go up in near future. When that happens, the flow of money outside US will get hit further.
What could be the driving factors?
Urbanisation, demographics and education are some of the growth drivers.
In the countryside, you grow what you eat and eat what you grow. But when you come to the urban areas, you start earning money and start spending. You grow nothing, so you need to go out and spend on food and other consumer goods. Urbanisation flows neatly into consumerism. Urban consumers upgrade all the time. They demand transport, entertainment. All this leads to rapid growth.
Big countries in Asia, like India and China, have big populations with a lot of young people. These young ones enter the workforce and start driving consumerism. Also, most Asian parents attach high importance to education. Education also has a significant impact in driving growth. Further, export, as a percentage of GDP, is lower in India and China. From investors' point of view, this is a favourable feature as the economy is more stable.
Smaller countries like South Korea (20%), Taiwan (17.3%) and Hong Kong (12.7%) have more weightage than India (11.3%) despite it being the third-largest economy in Asia. Why?
It is a function of size of the stock market and the free float available. Much of India's economy is still not represented in the stock market. Also the free floats of companies are relatively low. In contrast, markets like Hong Kong have been around for a while. It has big banks listed with higher free floats.
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