For India, however, foreign investors remain cautious as higher oil prices and the limited impact of the artificial intelligence (AI) theme weigh on the investment case.
Brandt expects foreign investors to remain “leery” of India until oil prices fall meaningfully towards around $80 a barrel. He also says the unwinding of the yen carry trade is likely to have some impact on capital flows, but cautions against writing its obituary yet.
This is an edited transcript of the interview.
Q: What is it that would bring emerging market flows back? I mean, on the one hand, you have the AI theme which is continuously playing out, but on the other, you have the risk of a rate hike coming by as well. Were that to happen, then money flows back into developed markets. So, where do you see flows, and at what point do they turn towards India?
A: At the moment, we’re on sort of the final leg of the summer lull here. But that interest, if that’s the right word, is very much focused on the fixed income side at the moment, both the interest rate-inflation dynamic and the fiscal concerns that have produced a marked steepening of the yield curve.
That said, there’s certainly broad outperformance in emerging markets equity, and we’ve definitely seen more consistent, if not stellar, flows into the diversified global emerging markets equity funds certainly over the last two months.
When it comes to India, every time I start to see the foreign interest sort of thaw and start to nudge back towards actually committing money into dedicated India funds, something macroeconomic tends to happen. The latest hit has come from the resurgence in oil prices.
But for India, it remains somewhat a tough sell at the moment. The AI story has somewhat bypassed India. Energy costs have been much higher than is ideal for India.
So, I think until we see a meaningful drop in oil prices back towards around $80 a barrel, foreign investors are going to be leery of India.
Q: What about the unwind seen in the yen carry trade? Yen was about 160. Now we’re down to 153. And yesterday, Scott Bessent’s statement, “I’m the house. I have asymmetric information.” Basically saying, don’t bet against the house now. I mean, these moves that we’re seeing in the yen carry trade, the unwind, the appreciation of nearly 5% in a span of a last couple of weeks — how is this impacting the flow of capital?
A: It’s occurring on a fairly thin market at the moment, so it’s a little hard to get a very clear read.
What I will say is that the death of the yen carry trade has been pronounced on multiple occasions during the current decade. And while I think it’s going to be a real thing, Japan is slowly nudging interest rates up, and government policy is very much directed at a capital repatriation theme, it doesn’t tend to happen very quickly.
So, I think there’ll be some modest evidence of a pullback, but I’m not ready to write its obituary yet.
Q: In terms of flows to emerging markets, could you give us some relative numbers? You know, who has got incremental flows, if we look at markets like Taiwan, KOSPI, you know, how are the flows to those markets in comparison to, say, China and India?
A: They’re fairly flat to negative. Both Taiwan and Korea face headwinds when oil prices head towards $100 a barrel, and investors have certainly been kicking the tires on the AI theme without actually abandoning it just yet.
So, it’s been a fairly hostile climate over the past few weeks for what were previously the high flyers, which were Korea and Taiwan equity funds.
Watch the full conversation here
We’ve seen a cautious pick-up in flows into Chinese mainland equity funds, but basically, such appetite as we are seeing is for diversified exposure for the regional funds and the global emerging markets (GEM) funds that I mentioned earlier.
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