Q&A: Joe Zidle, Bank of America Merrill Lynch

'Weak US economy providing India liquidity'

Ashish Rukhaiyar
Mumbai, 20 July 2011

A weak global economy cannot be as bad for India or China as it is generally perceived, says Joe Zidle, director and global wealth management investment strategist at Bank of America Merrill Lynch. Zidle, who has also served in the US Army reserves’ Military Intelligence Unit, tells Ashish Rukhaiyar that Indian markets will peak in 2011. Edited Excerpts:

Given the current equity market scenario, do you think emerging market economies have an upper edge over developed nations?
Global equities are in the midst of a correction and our view is that this correction is happening in an environment where equities will rebound. We will finish the year higher, with equities being the number one performing asset class, followed by commodities, bonds and cash. We are overweight on emerging markets (Brazil, Russia, India, China) compared to developed markets, because the strongest economic growth is coming from here. We think the global economy will grow this year by 4.1 per cent, with the driver being emerging markets at over six per cent. Developed markets like the US, Europe and Japan will grow, may be, at two per cent.

During the 2008 crisis, analysts spoke about decoupling factors that would benefit countries like India. Do you think decoupling actually works?
India, China and some of the other emerging markets never even had a recession. The US and Europe have to keep their rates low as they have to revive the economy. What this means for a country like India is that it will provide liquidity. US companies are using this liquidity by investing in India. So, the problem with US policymakers is that they can stimulate growth but cannot control where that growth happens. This is not exactly decoupling but a weaker US and European economy will continue providing liquidity to the Indian economy.

India has been one of the worst performing markets in the current year. What are global investors, who have access to markets worldover, talking about India?
One of the primary concerns would be high oil prices, followed by high commodity prices. So, global investors are looking at the role higher oil prices will play and, in turn, how they drive inflation. Fifteen of 21 central banks of emerging markets have raised interest rates in the last six months. Our view is that India does have a better grip on inflation, as the central bank (RBI) moved early and fast by hiking rates. So our view is that the India and China story will be peaking in 2011 and then begin to come down.

Are global investors looking at India in a significant manner while deciding on their emerging market allocation?
First, investors need to get the economic outlook right. According to our estimates, in 2011, 55 cents of every new dollar of growth would come from the BRIC countries. The share of the US would be only 14 cents. Now, there are two ways in which global investors can take exposure to India. One is direct exposure and the other is US multinationals investing in India. Our view is that such entities would continue to be attracted towards India till the time the rate hike cycle is complete.