Banking sector still robust and attractive: JPMorgan

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Banking sector still robust and attractive: JPMorgan

Rukhshad Shroff, Investment Manager and India Country Specialist, JP Morgan Asset Management is betting big on India. In an interview to CNBC-TV18 Shroff said that he is still positive on India even though global environment is quite uncertain.

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Though markets are a little tepid on the weak global sentiments, some experts and foreign institutional investors (FIIs) are still bullish on India among the emerging markets.

Rukhshad Shroff, Investment Manager and India Country Specialist, JP Morgan Asset Management is betting big on India. In an interview to CNBC-TV18 Shroff said that he is still positive on India even though global environment is quite uncertain.

"Risk aversion is not leading to FII outflow from India," he added.

However there might be a short-term volatility in India, he added. Shroff said that there has been decoupling in economic sense.

Below is a verbatim transcript of the interview. Also watch the accompanying videos.

Q: How are you feeling about markets generally nowadays? Is the global setup making your nervous or you remain confident?

A: It's not making me nervous but the global environment is very uncertain. We have got an environment where there are risks of a double dip in the US. There are deflationary risks in many parts of the world and Europe looks uncertain. But we are positive on emerging markets. We remain very positive on India and if you take a slightly medium-term view, there are ample reasons to be cheerful and optimistic on the Indian market.

Q: But, tactically, are you cautious looking at the global setup right now even on outperforming markets like India and other emerging market equities?

A: If you look at the overall Asian universe, we are tactically and structurally positive on India. In the short-term, there maybe volatility and hiccups because the markets done very well but, generally speaking, we have got all the ingredients for a reasonable market in place. So fundamentals are good, corporate earnings are good, valuations maybe slightly on the higher side of long-term averages but that was the case even six-months ago and the markets held up, which means the markets digesting these valuations allowing earnings to come through and if you take a two year view I think we are alright.

Q: What is the level of interest for markets like India because we are seeing some solid flows for the last couple of months? What's been your anecdotal experience? Are you receiving regular cash inflows into your India products as well?

A: We are going through an extremely important stage in the last eight-nine months of this calendar year. That stage is that money and money managers are beginning to differentiate on the basis of fundamentals. Let me explain-if I told you six-eight months ago that the US economy and its recovery would start to stutter-that there was risk of double dip, there was a deflationary risk; countries in Europe were potentially likely to default on their sovereign bonds and an environment like that of extreme risk aversion-I would have guessed and a number of your other guests would have also guessed that in India would see foreign portfolios turning negative.

Risk aversion means you run away from emerging markets-that was the traditional view. However, the exact opposite has happened. We have had one of the strongest periods of foreign portfolio inflows this calendar year to date-USD 10-11-12 billion.

So what the market is telling you and it's telling me is that the old principle of just rush into US bonds, which is happening anyway, and shun every risk asset is no longer true-people are differentiating. India has got 8% growth, corporate earnings are robust and money is flowing in and inflowing into Indian funds, its flowing into global emerging market funds and its flowing into ETFs. We are seeing a lot of interest from our client base across almost every geography. A lot of our big clients this year have doubled and tripled their investments in India.

Q: Long-term portfolios and global emerging market (GEM) funds are getting money its not just ETF money, which tends to be a bit more fickle, which is been coming in?

A: I am not able to differentiate what is fickle and what is not but at least in our own experience-we don't run ETFs-but in our own experience I would say that very high quality investors by definition of how long they invest in these market have been increasing their exposure to India through our fund and that's very encouraging at least to us.

Q: Would you go as far as to say that the decoupling, which we all spoke about in 2008 but never happened, might actually be happening?

A: In some sense the first thing is no one is using the "decoupling" word anymore, which means the chances of it actually happening have increased. But if you look at it we have had accelerating economic growth over the last eight-nine months whereas the rest of the world has seen growth revisions go down. So in an economic sense, we had already seen some amount of decoupling.

Risk assets are being shunned in many parts of the world and people are buying US treasuries even at what look like record low yields. But India has seen record, if it not near record, FII flows. So, that again fund flow element of decoupling and the markets held up reasonably well in an environment of somewhat weak equity markets overall. So we maybe in the process of decoupling without fully noticing it.

Q: What is the general level of interest you find in India? Is there an acceptance now that this economy has very superior or much superior growth parameters or metrics than many other economies, and that is drawing in disproportionally a higher amount of money compared to other emerging markets or peers?

A: There has always been interest in India, but sometimes it is over shadowed by interest in China. We cover the whole world in terms of our target audience and a lot of them are firstly coming to India for the first time in larger groups and are coming more frequently. That itself is a first hand experience of India which I think is a very powerful draw.

You and I can talk about India, but as long as people do not experience coming to India meeting with companies and understanding the dynamics for themselves, it remains one degree removed and that is happening. We are seeing a lot of interest in clients coming into the market and visiting companies here.

Secondly we are benefitting at the margin although I am unable to quantify. There is a benefit that accrues to India at the moment, because some people have doubts about the outlook for the Chinese economy. We remain quite positive on China, but there is some concern about hard landing, soft landing and over heating. As a result of that, India has managed to stand out as an attractive alternative, more so than in the past.

The attraction for India is the sustainable growth of about 8%. India has a very powerful and sustainable demographic advantage that most of the large counties don't have any more. That will unfold over the next 5-15 years. The corporate sector is very attractive. In fact one of the most attractive in the region and that is attracting investment. So sustainability of growth and the quality and profitability of growth are the key features.

Q: Can India become the equivalent of say an HDFC Bank , good stock which is expensive but continues to remain expensive? We hear of many investors cribbing about valuations in India but they cribbed about HDFC Bank's valuations as well. The stock always outperformed despite remaining at elevated valuations? Could India become the equivalent of that in the emerging market space?

A: Some people would argue that parts of that are already true. India is not low PE market and I don't think it should be. I think its fundamentals should support a higher PE. Valuations are not just a function of next year's earnings, it's a function of many variables and it's a function of earnings sustainability over a period of time. Just like HDFC Bank, if you look at one year's earnings you get one result, if you believe in earnings trajectory consistent for two-four years; you arrive at a different outcome, even on the valuation debate. Profitability and return on equities is and how companies and countries use capital, should sustain that. We have all those ingredients.

We have a corporate sector that is different from other countries. The IT services sector doesn't exist in most other countries and its not a low PE sector nor should it be. There are such attributes that could make India attractive market even though the PE multiple on a near term may appear and I emphasize appear expensive.