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Markets will be volatile in next few years
February, 12th 2010

With the euro zone springing new surprises, global economic recovery will be longer and volatile; the equity markets much more so, says Dr Yuwa Hedrick-Wong, Economic Advisor, Asia-Pacific, MasterCard Worldwide. At a recent MasterCard conference in Singapore, Dr Yuwa gave Business Line a glimpse into the findings of his business confidence outlook report on India, to be released in March.

Excerpts from the interview:

India is always compared to China; you have researched China's savings and consumption and are now looking at India. What kind of an economic outlook do you see for both?

In many ways, the trajectory of both countries is set to essentially go forward and upward in the foreseeable future. But that doesn't mean there will be no short-term cyclical ups and downs.

To ignore or deny that would be stupid. We cannot say that because the long term looks great there will be no problems in the short term. Or, on the other hand: Oh my god, look at all these short-term challenges the long term is in jeopardy.'' For both India and China, the long-term outlook is positive, but not without short-term ups and downs.

And how will the equity markets behave?

The equity markets will be volatile in the next few years. Especially in the case of India; China has capital control, and still has not managed its currency. India has done it. So India is far more exposed to the sudden ins and outs of capital flows. And that affects the exchange rate of the rupee.

So the Indian equity market could be more volatile than China's. In both, we've seen a little increase in the property markets too, but the increase is a little slower in China compared to India.

Also, from a developer's perspective, the investment in the property market is more debt-driven in India compared to China. But China's urbanisation process is much wider in scope.

For instance, in the last 10 years, most of the urbanisation growth in India has happened in the top five-seven cities. But in the last 10 years, the top four cities in China grew slower than its overall urbanisation growth.

In other words, China's wider urbanisation has allowed its housing market to be more diversified. My worry about the Indian housing market in the short term is that it is highly concentrated in a few cities, and within them in a few neighbourhoods. So the boom-bust theory comes in.

Hence, we should become more mature in our outlook. To sum up, the long-term rise of China and India is gaining traction and is unstoppable. But things could still go wrong.

As an economist, do you think the worst is behind us in global economic recession? Just when there was talk of green shoots, the smaller European countries Greece, Poland, Ireland, Spain, Italy are in crisis.

That's why I think the recovery from the global point of view will be volatile and I feel the euro zone this year will be in recession. They have a much, much longer way to go and they will be a drag on the global recovery. So, Asia really has to do a lot and, thus, China-centric kind of recovery is good news and one can thank God for that. But, on the other hand, we are facing another kind of risk. We now have all our eggs in one basket, and China can get it wrong.

Are you saying the news from the US is better than from Europe?

Relatively, yes. I think in the euro zone a lot of banks' exposure to Eastern Europe and the Baltics is still unresolved. Many loans have got rolled over but are still there.

So, when that is resolved in the next year or so, the banking system will have to literally start from scratch all over again.

But the American banking system is ready; the big concern in the US is now on the bonuses and those guys earning so much money all over again.

Do you think those fat bonuses are justified?

I'll tell you why. One reason they enjoy such high earnings is because there are so few of them left. People forget there is less competition; today we are left with only two investment banks functioning Goldman (Sachs) and JP Morgan. Others are either gone or struggling to survive.

So even though, let's say for example, the overall investment market shrinks by half, you've moved from 10 or 20 players down to only two. Which is why they're enjoying this huge windfall. In that sense you can say it's justified.

But, what allowed these two to be here is taxpayers' money. They got bailed out. So it's complicated.

Give us a preview of your research project on India.

It's a business confidence report and one important insight it gives me is that in India, in the second half of last year, a new investment cycle has started to kick in.

I asked myself: What are the macro conditions under which this investment cycle got started.'' Well, it turns out it was under conditions of massive contraction of exports, including IT services, massive capital flight, rising unemployment and creeping inflation.

My point is that if any one of those conditions had been present 10 years ago, it would have been enough to tip the Indian economy into recession. So what does a new investment cycle kicking off tell me as a researcher? It tells me people have a completely different attitude that never existed in India before.

It is a risk-taking attitude, a positive outlook that allows both business and household decision-makers to be so much more resilient.

Therefore, they will look at all this as a short-term setback and move on. To me that is the biggest change in the Indian economy in the last decade.

Any comments on how the Indian economy is being run?

The Centre is making all the right noises and moves. But in the Indian political reality, the Centre plays a very limited role compared to the States and that is the big challenge.

I think some States will pull far ahead and some will get stuck, making the national picture not so rosy.

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