In a wide-ranging interview, Krishna spoke with Tom Keene and David Gura, co-hosts of Bloomberg Surveillance, on a variety of topics, including the current state of the financial markets, prospects for global economies, the outlook for developed and emerging markets, and what investors might expect from the incoming leadership at the U.S. Federal Reserve (Fed).
Tom Keene: If you were giving a speech today, what would your single most important message be?
Krishna Memani: The single most important message is, in this environment, it’s very easy for people to get complacent or fearful. Fearful because we’ve had a very long run, market levels are high, and therefore some may be anticipating some sort of a crash. I think that can paralyse people. At the same time, because the markets haven’t corrected in a big way, not anticipating what drivers to look at in the markets, and ensuring that if things are going to change, that we have some idea where [those changes are] coming from.
Tom: How correlated are international markets right now, whether it’s market to market, across asset classes?
Krishna: The correlations in various markets are high. But I think the reason it is high is because the markets, at the moment, are being driven by synchronised global recovery. Ever since the correction in oil prices in the first quarter of 2016, the global economies have come up together and therefore the markets have gone up together as well. They are correlated but I don’t think that’s really a matter of huge concern. I think that what we have to look at is what is going to happen over the next two years, as opposed to what happened over the last two years. At this point, it seems to us that growth in emerging markets is getting deeper while growth in the U.S. is flattening out. As you think about your investment strategy that is the theme you may want to consider incorporating into your thinking.
David Gura: How do you navigate that divergence then if you’re seeing the two things split off in the way that they are?
Krishna: I would say it makes emerging market equities and emerging market debt far more attractive than they have been at any point because valuations in emerging markets are much better than they are in developed markets, especially in the U.S. Economic growth in emerging markets is getting deeper and is less China-dependent. If you look at an economy like Brazil, which was a basket case two years ago, if in 2018 they were to grow at 2% or 3% or 4%, we wouldn’t be surprised at all. So things are changing very rapidly in emerging markets, growth is getting deeper, and I think that makes emerging markets much more interesting from an investment standpoint than developed markets. That’s the big theme.
David: How do you navigate the low volatility that we’ve seen? Do you sense that we could see an uptick in that any time soon?
Krishna: You look at low volatility and you always get worried. Am I missing something? Markets are too complacent. But I think you have to take a step back and try to figure out what is the driver of that low volatility. At the moment, the driver of that low volatility is synchronised global growth, low policy rates, and lack of inflation. If any of those things change, volatility would go up meaningfully.
Tom: This is critical then. If any of those things change, one of them – or as you know, when they change, usually a set of them changes – can you manage the various glide paths, where you can shift assets and portfolios?
Krishna: I think the pace of change is going to be more gradual than it has been in the past for two reasons. One, the economic drivers are far more stable. Inflation, which typically ends up upending things, really isn’t that prominent a factor and, if it comes up, it will come up very gradually. That’s one. And second, policymakers are on the case. They are singularly focused on making sure that there are not significant dislocations in the economy and that’s why policy rates are as low as they are.
David: You talked about emerging markets exclusive of China. Help us understand the role China is playing now when it comes to economic growth in the developing world and when it comes to investment more generally.
Krishna: China is the second-largest economy in the world [after the United States] and it is currently growing faster basically than any developed market. Investments are a large component of that growth. China’s savings rate is roughly 50% and I think that volume of investments has impact globally because China ends up being the largest consumer of commodities on a global basis.
Therefore, what happens in China is very relevant to what happens for commodity prices and what happens to emerging market exports. When China was slowing down meaningfully, because they cracked down on investment in real estate and things like that, we had a commodity issue in the market. Subsequent to that, things have stabilised as China put more stimulus in. So growth in China is very critical to growth in emerging markets, in my view. Having said that, as China slows down and as other emerging markets come out of their downdraft, growth in emerging markets is becoming less dependent on China. That’s a good thing. It means growth can be sustained and it will be less volatile than it was over the last five years.
Tom: A million years ago, international investment [boiled down to] which concrete company should we buy? That was literally the whole strategy. You bought one telephone [company], one concrete company, and done. And it’s moved on to a little greater sophistication to say the least.
Krishna: Thankfully! The world today is full of really good companies. At OppenheimerFunds, the way we approach our investment philosophy is not about geographies. It’s not about India, it’s not about China. It’s about looking at great companies in India, great companies in China, for example. Even if there’s an economy we don’t like, we can always go out and find a company in that economy that we like, as we did with Russia and Brazil, which were sucking wind for a while.
David: I know that you’re waiting with bated breath here to find out about the new Fed chair. We have Jerome Powell. He’s going to be filling that position if all goes according to plan. What’s this Fed going to look like? How’s it going to be different from [current Chair] Janet Yellen’s Fed, if at all?
Krishna: I don’t think the core of the Fed is going to be dramatically different from Janet Yellen’s Fed. I think what is far more important is the fact that this is a later-cycle Fed. So I think the policies that the Fed implements are not going to be because the Fed is different, it’s just that the economic cycle is at a different point. Our expectation is that there will probably be some tightening next year, probably some tightening in 2019. Whether that is three or four in 2018 and three or four in 2019, I think that is up for debate. But as economic growth in the U.S. remains stable and the unemployment rate continues to go down, the trend in the U.S. is for tighter policy rather than easier policy.
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