The world is caught up in bitcoin mania. What is your take on this cryptocurrency phenomenon and prediction of its fate?
It’s hard to know where the interest is coming from. It’s likely just self-perpetuating momentum that draws in more and more liquidity. It’s not really money although it can be used for some transactions. So it feels like a speculative vehicle and no more.
For most major economies and markets, 2017 was a great year in spite of the retreat from globalization, Brexit, North Korea, Middle East problems etc. Why did the market overlook these developments?
Because the underlying economic fundamentals were and are quite strong. In general, economic strength can overwhelm many seemingly intractable political problems. If the economies had been vulnerable before those problems, the political issues could have brought on a recession.
As we get in to the New Year 2018, there is great optimism all around. Is this optimism justified?
It’s likely justified for the economy as the world expansion is robust, synchronized and entails most all countries. However, a robust world economy suggests higher inflation and higher long bond yields. That would bring higher financial market volatility, a likely stock market correction and tough times for holders of long duration bonds.
What are the downside risks that you think are being overlooked currently?
We expect that the high odds that inflation will reach central bank targets next year and the higher bond yields that that would suggest.
What do you see as some of the biggest investment opportunities in 2018?
We believe that commercial real estate might do reasonably well as rents would likely continue to rise with a bit higher inflation. If yields on two-year US Treasury bonds get to 2%, they would likely be a good buy. Shorter duration corporate credit, the better quality of both investment grade and high yield. If interest rates don’t rise, Japanese stocks might be a good bet.
Where does India stand vis-à-vis other markets?
With growth on the rebound from the uncertainty of demonetization, the GST and bank recapitalization, India could surprise on the upside. Profit growth is likely to return and GDP growth could pick up the pace as it did in the latest quarter. So the stock market could outperform.