Fitzsimmons: Mexico, India & Indonesia Attractive Long Term

September 16, 2014

Brendan Fitzsimmons is head strategist at Medley Global Advisors, a global macro research and advisory firm based out of New York. The firm is part of the Financial Times' media empire, and is run by the former editor of Lex, the FT's incisive investment column. Medley Global's goal is to tap into FT's full reach of the world's leading policymakers, government officials and investment experts for insights that will be valuable to the world's top hedge funds, institutional investors and asset managers.

Fitzsimmons recently sat down with to discuss the potential implications of Scotland's exit from the U.K. He also tells us why he's neutral on the eurozone and which emerging markets he thinks are poised for long-term growth due to recent political changes. In a surprise twist, the pound sterling is getting crushed, with the Scottish referendum to leave the U.K. gaining momentum. What's your take on all this? Should U.K. or European stock investors be concerned?
Brendan Fitzsimmons: I think in part it's a function of how little previous pricing of the risk of a successful vote had been, because the polling had not shown a surge in the potential for a yes. I think it was really dismissed as a tail event, which is now being called into question by the narrowness of the most recent polls. So I think part of it is a repricing for a tighter race that has become more evident, then some overreaction.

Part of this is also a function of where things have been with regard to the U.K., to the economy in terms of expectations for the Bank of England. Although they had been unwound somewhat from the most hawkish expectations a few months ago when you had the Mansion House speech, which basically had the Bank of England warning the market that it might be coming sooner than the market was thinking.

So the market was seen as complacent. That gave a bid to sterling, from which it had started to retreat because some of the data had not been as compelling for the soonest move from the bank scenario.

I think part of this reaction is still an assumption that this will take some of the wind out of the sails of a sooner move by the Bank of England, just because of uncertainty and because of the presumed implications of a successful vote in terms of the U.K. economy, in terms of the lost output.

First of all, even if there were a yes vote, it would take some time to process the reality into fact, and during which time, it's not certain that you would have a negative impact to the U.K. economy. To the extent that you, down the line, would lose output, you would also lose the costs, or the transfers that go from London to Edinburgh.

So I think it's more complex than the knee-jerk reaction, but the knee-jerk reaction itself is understandable given the polling and the debate and the broader context of the U.K. economy and sterling seen as outperforming obviously the euro.

The other thing is, it goes beyond Scotland in the European context, because it's seen as, if it can happen here with Scotland, it certainly puts potential flames to tinder in Catalonia and potentially re-stoking issues in Flanders with regard to Belgium. In that context, it would be a wedge of uncertainty that has not been priced.

It's kind of like you pull the strings on the Scottish referendum, and it runs through the weave of a number of issues within Europe, at a time when the European economy itself is performing even more weakly than it was doing earlier in the year when the expectations were not so great of any risk from Scotland. Eurozone stocks have gotten hit in recent months, with some broad indices down over 10 percent. What are you telling your clients right now with regard to the eurozone? Do you see this sell-off as an opportunity?
Fitzsimmons: It still feels too soon to be judged an opportunity, because while you have greater commitment, as we've seen in the recent sort of slate of moves, both actual and prospective from the ECB at the September meeting and Draghi's anticipation of Jackson Hole, it still, between the articulation and the delivery, and between the delivery and the impact—which the ECB itself admits takes time and does not primarily address the challenges, because they're bound up in issues on the structural reform in terms of the different fiscal positions of respective states—this is something that's really a time-buying mechanism, rather than a palliative.

That's where I think the reality of the data being weaker, in addition to the continued persistence of disinflation, works against this being seen evidently as an opportunity despite the fact that you've already had some notable repricing. Switching over to emerging markets, last quarter, you hinted at positive developments for Indonesia, where you saw value. Now that Joko Widodo has won the elections, are you more optimistic about Indonesia's prospects?
Fitzsimmons: It's in line with the elimination of that uncertainty and the generally more beneficial outcome that was bound up with that. In both the Indian and Indonesian case, you've gotten the positive market outcomes.

Then you get into the next stage—and we've already seen this in the past year-plus on the Mexican case—there's also a period of getting over the honeymoon of the initial political event outcome and getting the sort of machine of policy, and from policy formulation, to policy implementation, to the reaping of rewards, and that amidst the challenges of what's going on in the domestic and global economy.

It's a broadly positive story for Indonesia, but it's not going to be without its bumps between here and going forward. You mentioned Mexico and India. Since you singled out Mexico as a rising country back in February, its stock market has surged. The Indian stock market has literally gone gangbusters due to expectations of reform from Modi. Has all this optimism already been fully priced into the Mexican and Indian markets, or do you still see value in these markets?
Fitzsimmons: It depends on the time frame. I think in a shorter time frame—and we've actually seen that prior to the beginning of this year in terms with Mexico—the overall story has been one of positive rewards in terms of the equities.

But it's not been without its hiccups in terms of the time scale for the primary legislation, the secondary enabling legislation, and then people thinking about it in terms of certain sectors, being bad for a certain industry before they're good for the nation.

I think that experience in Mexico is probably worth paying attention to and instructive for processing the progress or lack thereof in terms of the expectations and the valuations that have been priced in terms of India. I think the Indian story is seen, and will continue to be seen as positive, given the capacity at the Reserve Bank of India to manage policy, and given this well of expectation in terms of Modi.

I think what's still not clear is how proximate the deliverables will be, given how much you've boosted the prices. That's why I said time scales are important here. If you're talking about between now and the end of the year, if there were to be a hiccup in the broader global equity story, either into the end of the quarter or into the end of the year, India would be at risk of being sold.

But if you're looking beyond the end of the year, through next year and over the next couple of years, provided that Modi is able to move from concept to action, it's still a positive story.

That's in contrast today with China, where the expectations have been so high, and the ability to continue to deliver at or above those expectations has been challenged over the last two years.

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