We have been looking at the very strong momentum US markets have been showing in the last few weeks going into a lot of commentary coming from Mr Bernanke, the PCE data and now the jobs data. Is Wall Street looking at that data or not?
Arvind Sanger: Absolutely. Right now, the data is showing that the economy may be headed for a soft landing. But there are always risks around that so the market is looking at. The employment number is going to come out. We will be looking at that. The expectation is that the 4% unemployment rate which was last month, last data point will remain relatively constant and may go up by half of 1%.
But if we see a sharp rise in unemployment, then you could get the fear that maybe the economy is slowing down too much. But if we get continued easing in the labour market, then what Chairman Powell said at this central bankers meeting in Europe a couple of days ago would hold that the Fed is headed towards easing and the consensus seems to be thinking that it might happen by September, because if the data both on the employment side looks less strong and the other inflation data keeps confirming that inflation is headed to the mid 2% or lower, then that gives Fed freedom to start on an easing cycle.I guess the other factor to look out for is the presidential race. Until last evening there was a lot of chatter that perhaps Joe Biden is going to opt out. Now, he says he is going to continue and the markets are looking at it rather simplistically that a Trump victory would mean more legs to the bull market.
Arvind Sanger: I think both have pluses and minuses, let us be clear. Trump is talking about keeping corporate taxes low or lowering them, that is good for the market. But he is also talking about tariffs, which are not necessarily good for the market. President Biden wants to raise corporate taxes, but he is also talking about maybe a little bit more concern about the deficit while Trump does not seem to be as concerned. So, there are mixed pluses and minuses. The market is just taking the view that.
I think the market would like a not-too-strong mandate for either side, meaning you do not want a big sweep, Democratic or Republican. A big Democratic sweep looks very unlikely, but a big Republican sweep is possible. I am making a bad analogy, but maybe like the Indian election. As long as Trump does not have too much of a majority to do too many of the more extreme things and is more focused on the economics stuff, to do sensible stuff, then the market would be fine with it. But that is where I think the current consensus seems to be. I want to talk to you about how FIIs are changing their stance on emerging markets now. China saw a lot of good funds. In June India was a recipient of FII flows. Do you think we will build upon this and after a gap of two years almost, FII will come back as some of the strategies back here are making a case or it is uncertain still?
Arvind Sanger: India is quite a bit overweight in emerging market investors. I do not think the overweight is going to end. Now, month to month, does China come into flavour because the Chinese market is trading at more than one standard deviation below its historical average? Yes, it can get some, there is a major meeting of the party Congress in the middle of July. Will there be anything that comes out of the Chinese Politburo and the Congress which causes any optimism to flower?
If you talk about major emerging markets, China can always get its moment in the sun, but the reality is that if you are taking any reasonable period, there is no doubt that India is in a strong position and part of the challenge for investors was getting confidence on where the Fed is going. As that confidence is gaining momentum and the Fed is on an easing path, then emerging markets flow should continue and India should be a beneficiary.A quick word then on what is happening in the UK. Conservatives are ousted after 14 years.
Arvind Sanger: Well, there is no surprise here. Markets buy the rumour, they do not buy the news. And the data was very clear that Labour was headed for a landslide victory. If anything, it is a little bit less strong than what some of the polls have indicated, but it is still very strong. So, now we will wait to see what Labour does. But I think the lesson for the broader markets is if you look at what is going on in France, incumbents are in trouble.
And in France, there may be enough of an opposition confluence that the National Front does not get an outright majority in the coming vote on Sunday. But there is a lot of election stuff going on around the world. The Democrats are in trouble in the US because they are the incumbents. The Conservatives are in trouble in the UK because they were incumbents. And clearly, the incumbent Macron has suffered a lot in terms of the performance of his party in the French election. So, in general, the trend is in that direction.
But one country is going left is the UK. France is going, we do not know how far right in the right wing and the US may be leaning more towards the Republican which is more right. So, it is a mixed picture. But I would argue that the political risk in global economies is growing because a lot of anti-free trade kind of ideas are gaining momentum and that is something to keep an eye on as to how that impacts medium to long-term global growth because anti-free trade stance is bad for everybody.
