Investing in emerging markets is no laughing matter and it should be a central concern for all investors worldwide. That's the word coming in from emerging market evangelist, Jerome Booth. As a part of CNBC-TV18's RD-360 series, market expert Ramesh Damani spoke to economist and author Jerome Booth and discussed his concerns in the developed markets and his outlook on India and the other emerging markets.
Below is the verbatim transcript of Jerome Booth's interview with Ramesh Damani:
Jerome: Finance theory that we use is not fit for purpose. This isn't necessarily a statement against academics but as Milton Friedman said if a theory has neither realistic assumptions nor testable results then it is useless and a lot of finance theory falls, maybe technically correct, but if falls under that category and so it is the widespread use of that theory in inappropriate ways which is effectively effected as allocation on a global scale affecting hundreds of millions of people and this is wrong and we need to change it.
So yes, we do need to smell the coffee and the biggest problem of all in asset allocation globally for investors is the agency problem that people are managing other people's money and they have different incentives and one of the biggest problem is that they use the theory in the knowledge that is not fit for the purpose but because everybody else does.
Ramesh: Herd Mentality?
Jerome: Yes, there is a huge herd mentality.
Ramesh: Developed markets have a problem according to you.
Jerome: Yes.
Ramesh: What is the problem?
Jerome: The problem is that we have depression like conditions which is what I was coming on to say about - uncertainty specifically and we have just way too much debt. The average for, what I call heavily indebted developed countries which because somebody else called, rather condescendingly group of countries heavily indebted poor countries, so I call them heavily indebted developed countries. The average debt to Gross Domestic Product (GDP) is 270 percent. Now when England had a debt to GDP of 240 percent after beating Napoleon it certainly took them half a century to get down to a sustainable level using fiscal policy. So that is not politically feasible today. These enormous debts are going to be eroded by a combination of two things.
First of all, and this is what is being tried today what we call financial repression. Financial repression is any policy which captures domestic savings in order to fund the government and to do so, they lower cost to the government, lower interest rates than otherwise possible and what you do is you have quantitative easing initially there to bail out banks, not to stimulate the economy, is now being used as part of that policy of financial repression by having very low interest rates. You then have higher inflation and that is what erodes debt over time.
If financial repression doesn't work and it is working; so far it worked very well for both Europe and the US after the second world war by the way then the other policy is inflation which is what was tried in the 70s and again that has negative real interest rates that is after inflation interest rates erodes the debt over a period of time. What I am describing is the plan in the west to rob their savers.
Ramesh: You are not a big fan of BRICS itself, you want the entire emerging markets spectrum?
Jerome: I am a fan of BRICS but I also invented the term CEMENT when BRICS came.
Ramesh: What does that stand for?
Jerome: CEMENT is Countries in Emerging Market Excluded by New Terminology. Why do four when you can do 64.
Ramesh: Having audience sitting in India how does India stack up in the scale of 64, new government, have you seen something promising out here?
Jerome: It is very exciting what is going on and you may have seen I have been in the press because we have announced USD 100 million that I am investing.
Ramesh: Which asset classes do you like? You are not great voter of equity only.
Jerome: No, absolutely. You should do everything. And actually the hard thing is often the best thing as Kennedy said and so I do like direct investing and that is what I am doing mostly myself in India.
Ramesh: You do private equity?
Jerome: Yes, effectively I own a company.
Ramesh: Spreading your business?
Jerome: Yes, it is real business. It is non-listed.
Ramesh: Which areas?
Jerome: Telecom.
Ramesh: Which other areas do you like. What are you doing in telecom briefly?
Jerome: Briefly, we have got a company in UK called New Call Telecom which is the sixth largest internet service provider in the UK and we are very adept, very good at marketing and understanding how the markets and the technology is changing rapidly and we see a huge demand for broadband and so we are targeting Wi-Fi, hotspots, things like that to the consumer within public spaces as well as home and in the office also messaging, fixed line and we want to basically provide some impetus in that sector. We see huge potential. We want to partner with all the big guys as well. We want to see areas that we can help them and this will point to which are the sectors that are interesting. Partly because the regulation is good and the government is reasonably hands off.
The regulation in India is very similar to the UK. In other infrastructure sectors that have got to have huge growth, there needs to be a similar sort of rethinking. There has been a lot of good things about infrastructure but we obviously need much more and that needs to catalyse all the potentials of having foreign investment as well.
By the way foreign investment I see very much as not a substitute for domestic investment. I see the main benefit of foreign investment in most cases to be providing competition of ideas and transparency and helping credibility for the market as a whole.
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