‘How China stabilises its growth is key’

Bank of Japan’s surprise cut in deposit rates to negative has taken the markets by surprise. Speaking to Bloomberg TV India, Kotak Mutual Fund’s head of equities Harsha Upadhyaya says the BoJ move provided a short-term relief to the market. The real worry is how China stabilises growth.

The BoJ cut policy deposit rates to negative cheering global equities markets. How are you viewing the big global developments?

Clearly I think the external environment continues to be very choppy. While the BoJ decision may give some short-term cheer, I don’t think that is going to resolve the problems that the world has today. I think all eyes will be on the Chinese policies — in terms of what they want to do to stabilise their growth and how will they take their currency policy ahead. So to that extent, we are at a point of time where the domestic issues are not really giving any kind of direction to the market. And if at all they are giving direction it is only on the downside. All eyes will be on the global factors for some more time I guess.

Are you worried about the way the external situation is really shaping up?

We have been seeing easy monetary policies across the globe for the past eight years and they haven’t done much to stabilise growth. And now we have a very convoluted logic of having negative interest rates on deposits from various central banks. While this stimulus will help the market for the very short term, I do not know whether they will actually stimulate the growth on the medium term.

How long do you believe the Fed will hold on to its trajectory and the hawkish stance?

For the first time in the last eight years, there is a divergent trend. The US is starting to increase its interest rates whereas all other economies are still on an easy policy mode. So it will be difficult for the US to actually sharply increase its interest rates, especially in a scenario where global trade and growth has been so sluggish. By doing nothing, their currency (dollar) is getting strong. And in case they (Fed) go ahead with sharper interest rates hikes their currency is going to become even stronger, which is not in the interest of their own growth. So to that extent our belief is that the interest rate hike from the US Fed will be very gradual this year and it will be spaced out quite meaningfully rather than having back-to-back interest rate hikes (every quarter).

The other big element continues to be the commodity market collapse. How much do you feel those risks will still continue to be formidable even for markets given the current global context?

I think from a macro perspective, we are much better off than where we were two-three years back. To that extent the fall in commodity prices, especially the global crude oil prices, have helped the macro economic situation. But at the same time that has not really translated into corporate earnings growth because of the inventory losses, which have kept coming every quarter.

Our macroeconomic factors have improved quite a bit in the last two years but our corporates have struggled to show earnings growth.

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