See no revival for atleast 2-3 yrs: Baring Equity

Rahul Bhasin, Managing Partner, Baring Private Equity Partners said that every time the energy prices have gone up substantially in the last 100 years there has been an equity bear market and he doesn’t think this time is going to be any exception. He said that equities as an asset class and Indian equities as a sub segment of that are going to be threatened. He does not see a revival for at least 2-3 years.

 Excerpts from CNBC-TV18's exclusive interview with Rahul Bhasin:

Q: With regards to the equity markets, how have you read this deep price damage that has come in and how do you generally gauge the sentiment towards Indian equity right now?

A: I think the sentiment towards all kinds of equity all over the world is poor and I don’t think India is an exception to that rule.

Essentially the cost of capital is going up and the cost of risk premium is going up and therefore all financial assets are going to be softer. Equities as an asset class and Indian equities as a sub segment of that are going to be threatened.

Q: Is this clearly a global equities bear market in your eyes?

A: Yes 100%, if one looks at every time the energy prices have gone up substantially in the last 100 years, you have had an equity bear market and I don’t think this time is going to be any exception.

Q: The point about real estate and where do you see valuations for that headed?

A: Real estate has come out of the cyclical high and the bubble. Ever since the reforms started in 1993 in India we have had around 120 million people migrating from rural India to urban India, which is roughly 10% of our population. The same thing happened in China and they started their reforms in 1978. In the first 15 years after the reform their population migrated from rural China to urban China.

We had a situation where we had zero urban planning, so we have had a huge shortages of all kinds of infrastructure; be it residence, office etc. Therefore we have had extremely high prices in real estate relative to the earning capacity or the sustainable economic capacity of that real estate. This is not something that is sustainable.

If there is urban planning there will be much better FSI. When you have higher FSI, there will be lower land rates. Even if there is a 50-60% correction is still substantially higher than it was 3-4 years ago in real estate.

Q: What is your own assessment of the sticky macro situation that we find ourselves in and how big a headwind it can continue to be for equities in the foreseeable future?

A: Our energy prices are directly linked to the oil and associated imports. The bill has gone up roughly from USD 40 billion to USD 110 billion in a year. That is an increase of almost USD 70 billion a year; that is just short of 6.5% of GDP.

Our entire tax base in the country is a little over 11% of GDP, so if tax collection is increased by 6-6.5% there will be very severe pain. This pain is the reality, which we can’t go away from. We have to accept it. Every segment of the society is going to hurt.

Since 2001 to 2007 that Profit After Tax (PAT) of Indian companies has gone up form 1.7% to 6.77%. So the segment that has gained the most in the last 5 years or 6 years is the corporate sector. People who will be affected the most will be the corporate sector.

The policy response of not gradually passing on energy prices, means that in one form or the other we are monitizing this excess cost. When excess cost is monetized it creates a structural inflation in the economy and the highest burden of that cost goes to the poorest parts of society. We are in a bad situation but it has been made worse by the policy response to that situation. In this environment it is very tough to be bullish on energy or in equities. There will be counter cyclical plays. Alternative energy is something that is going to stand out in this environment and probably do very well, but the exceptions are few and far between.  

Q: How do you see the environment for the entire primary market space? Many private equity outfits are going in for public listing. Do you think the primary market is going to dry up for a protracted period because of what’s happened with the market and the way the environment is right now?

A: I think retail investors have got burnt so badly, that they would be reluctant to take on incremental risk in the short-term. This is going to be another cycle and we will just have to live it out. I don’t see a revival for at least 2-3 years.

Q: What do you see global capital doing, although people have been extremely risk averse but given your experience in this space how do you expect the absolute return funds, the larger private equity people who have pumped in lot of money into India now approaching this market?

A: Private equity is a kind of delayed cycle play. Over the last two to three years there is so much capital being raised for India that we are still seeing deployment of that. So, I don’t expect a slowdown in the deployment of private equity capital in India this year. From the next year onwards I think we will see a sharp slowdown.

As far as listed equity is concerned, we have a denominator problem because assets all over the world are coming down. We will have a situation where emerging markets as a percentage of the total portfolio will become excessive. In spite of this very sharp correction, India is still one of the most expensive emerging markets in the world juxtapose. That, with the fact that we are looking at headwinds in terms of earnings and economic cycles, it is very tough to believe that we will see a lot of capital coming into the country.