India fiscal outlook dim: Fund wiz

India is adding unaffordable social expenditures to a deficit already struggling, Hari Hariharan said.

2011 was a particularly difficult year for profit hunters at Wall Street. Even the so called global macro hedge funds had great difficulty in navigating currency and interest rate markets. But Hari Hariharan,Chairman & CEO of New World Investments Management LP,a hedge fund that manages about $2.5 billion in assets rustled up over 24 per cent returns for his clients through what he calls staying committed to core views. The $100-million earnings catapulted him,the only Indian,to the big league the Forbes list of 40 Highest-Earning Hedge Fund Managers of 2011.

If you go back in time a bit,interest rate markets repriced like crazy after the QE2 (the second round of quantitative easing in the US) in November 2010. The market raised growth and inflation estimates aggressively. There was a massive sell off in the bond markets and a sharp increase in yields over the next four months. We at NWI did not buy this growth bullishness. When oil prices spiked sharply in early 2011 and the Japanese tsunami happened,our aggressively received interest positions worked beautifully. I was betting that the economy was not going to grow the way many thought, said Hariharan from New York,his home since 1990.

For 2012,his views which he calls tactical,are not so much in sync with what the overall market sentiment seems to reflect today. He thinks that the change of guard at the European Central Bank with Mario Draghi at the helm now has considerably mitigated the concerns on funding and liquidity in the region. For 2012,the so-called tail risk has been pushed out. There is breathing room now, Hariharan told The Indian Express. We have vacated all our European shorts. The maximum point of bearishness on Europe is behind us for now, he added.

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Hariharan,56,is an Indian Institute of Management,Ahmedabad,graduate and formed NWI in 1999 after a 17-year long career at Citibank NA,where his last role was Senior Managing Director and Division Executive of the International Corporate Finance Division. According to Forbes,his funds produced net returns in the 20 per cent (Hariharan says the flagship fund was up 24.7 per cent up) range last year on successful bets on the relative financial strength of emerging markets versus the industrialized world.

Chandrika,his wife,and also an IIM alumnus,is the CFO of New World Investments.

NWI does not have any material exposure to India. It is long on emerging market sovereign debt and some select emerging market corporate bonds. We are very cautious because of a worsening fiscal outlook. India is adding unaffordable social expenditures like the Food Security Bill to a deficit already struggling under the weight of subsidies, he said. Selling large amount of negative real rate bearing government debt to banks,insurance companies and pensions funds is akin to financial repression,he feels. Further,he is concerned that the worsening credit quality of large public sector banks may lead to recapitalisation demands,adding to the fiscal burden.

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