“There needs to be some new things for people to get excited about,” he told Fund Selector Asia. “The honeymoon period of [Indian Prime Minister Narendra] Modi and [Indonesian president Joko Widodo] Jokowi is over.”
Indian bonds, both high yield and investment grade, were the best performers last year. But strong macro news is needed to sustain the rally.
“A lot of Indian high yield bonds are reasonable investments. But they are pretty fully valued. If you are looking for outperformance, then it is difficult to say how you would get it from India as a whole.”
The market is looking for tax reforms, steps to encourage private sector participation in the Indian economy and some structural fiscal reforms.
“People are looking at the government now rather than the RBI [Reserve Bank of India] to provide the next leg of reform.”
He prefers to have a neutral allocation to India in the portfolio.
Likewise with Indonesia, where he reduced exposure to neutral from overweight. The government’s balance sheet benefitted from the fall in oil prices, which reduced oil subsidies. The benefit was supposed to be invested in infrastructure, but Jagger said that has not happened.
“The monetary policy in Indonesia has been kept tight because of the legacy of the `taper tantrum’,” he said.
In 2013, when the US Federal Reserve started talking about ending its asset buying program, Indonesia was hit hard by massive capital outflows and a plunging currency.
“The Indonesian central bank has built a lot of credibility since the taper tantrum by keeping rates high to defend the currency.”
Indonesia’s central bank has been under political pressure to cut rates since economic growth in the first quarter dropped to 4.7% from 5%. But the bank also needs to take into consideration the weakening of the rupiah, which might drive capital outflows.
In its recent meeting on 19 May, Bank Indonesia kept rates on hold at 7.5%.
“The worry in the short-term is if they cut rates, they lose that credibility and they will be seen bowing to political pressure.”
The firm has started re-orienting its portfolio away from India and Indonesia and toward China due to an optimistic outlook on China’s monetary easing measures, Jagger said.
