Diamond industry is a good investing opportunity: Thomson

Excerpts from What's Hot on CNBC-TV18 Watch the full show »

Emerging markets like India have lost nearly 25% from their highs in just one month, making them more attractive than they ever were in 2006. Chairman and CEO of Citigroup Global Wealth Management, Todd Thomson says that "emerging markets got a little ahead of themselves from a valuation point of view and from a fundamentals point of view."

He feels that things have much better values today, than ever before. He values India at P/E of 16-18, which is good for a fast growing economy

Excerpts from an interview given to CNBC-TV18

Q: What are you advising your private banking clients about their India investments?

A: Our feeling has been that the emerging markets got a little ahead of themselves from a valuation point of view and from a fundamentals point of view, but from the economic point of view, they continue to be very strong and there are absolute right indications of good, strong economic growth going forward, but markets sometimes under-value that or over-value that.

About 3-4 months ago, we got to a point of view that the markets have gone ahead of themselves and we expected a correction and now obviously a very significant correction is occurred. So for our clients, the most intelligent investors we have, they breathe a sigh of relief and said that, 'this makes sense and risk is now priced back into the  market, which means it is time to go back and invest in the market.' Unquestionably, things are at much better values today, than they were a month ago.

Q: Would it be values, where you would advice people to buy currently?

A: The cyclical valuations on a P/E basis, India is not an expensive place to invest given the growth potential and so from a public market point of view, it is a very reasonable valuation today and that doesn't mean, technically there may be some additional corrections that may occur, but if one looks at the underlying fundamental price equity ratios, then they are pretty reasonable. Lot of our investors who are interested not in the liquid investment, but more in the illiquid private equity and real estate investments and in those cases, allow them to happen at varied valuation.

Q: Are there any specific sectors, which you are interested in?

A: The services industry is obviously where a lot of people are focused on in India, and we as a company, have taken advantage of that by building outsourcing centres here in India for Citigroup. So, that has been very successful for us. But beyond services, the new wave is towards manufacturing. Even pharmaceuticals have been another area, where we have said this could be in fact a centre for R&D in pharmaceuticals going forward, which looks very interesting to us.

A lot of wealth is being made in the diamond industry, although it is not easy to play from a public point of view, but that is an area where we think there is a great opportunity. There is conventional wisdom out there, that India is for services and China is for manufacturing and more and more are going to see India also as place for manufacturing.

Q: Do you think India would be a prominent market for private wealth management?

A: Certainly, it would be prominent and although today, it is not relatively as big as some of the markets we operate in. It doesn't have the health that Hong Kong has or what the European Countries have. But as we begin to look forward and with a continuous 7%-8% growth per year, the continued development of entrepreneur growth, it is going to be a very significant country for us and if one looks forward, then maybe it would be one of the top five countries in the world for us.

Q: In the last few years, with global interest in India increasing, have you seen your clients come in and tell you to invest money in India?

A: India specifically is a very interesting place for a lot of our clients around the world to invest, and they have asked us specifically for opportunities to invest in India. And our approach has not just been to focus on the traded markets, but to focus on how we bring investment that build factories, that create jobs, that create hotels.

So far, we have done is to put together private equity partnerships for our clients from around the world to invest in, put together real estate partnerships for our clients around the world and that really builds productive investment into the country, and we see enormous amount of demand from our clients - whether they are in the rest of Asia, Middle East, from Europe and from the US.

Q: Do you service Japanese customers?

A: We have not been collecting assets from the Japanese to invest into these markets, although I have heard of cases. But aside from the Japanese, almost all other parts of the world are looking to invest in Asia. Even Latin America and other emerging markets are saying that the most exciting place in the world today for wealth creation is India and China and the question is how do they invest more intelligently, to be able to capture some amount of that value.

Q: How would you compare India and China? Do you see the negatives in India being overcome soon?

A: I think both places look attractive to us and in the short-term, we see a much bigger,  stronger and much more profitable business here in India than we do in China. The regulation here in India is a little easier. I think on the flip side of that is the investment that China is making in infrastructure is in multiples of India. And the concern out here in India is, can they continue on the growth path without continued investment in infrastructure, which is necessary to create an environment for that growth to continue. China seems focused and committed to making those investments and that is going to be a challenge for India going forward.

Q: Do you think this choppiness is at an end? What factors will bring an end to the kind of choppiness we have seen in emerging market equities and commodities?

A: We are in a very interesting market environment right now. On the one hand, there is a coordinated global growth and almost every country in the world is experiencing a strong economic growth and that is very unusual. Usually, you see the US growing but not Europe and Asia growing but perhaps Latin America not, but today every region around the world  is growing strongly.

Unemployment around the world is quite low, inflation incredibly low, interest rates are low, so fundamentally on the one hand - things look strong but on the other hand there are a number of imbalances and concerns - that exist out there.

There is the US twin deficit and there is concerns on what is happening with currencies like the US dollar, which is about to go on a little bit of decline. Then concerns about the run up in commodity prices - not only oil but others as well etc. So, a lot of uncertainties exist.

Our view is that growth is real and wage inflation is unlikely, because of the ability to manufacture in so many different places and the capacity that exists on manufacturing around the world.

Q: Do you think we have seen all the tough talks from Central bankers on June 29 or are we going to see more bouts of uncertainty in 2006?

A: I can't speak for the Central bankers but we may see another interest rate hike by the US Federal Reserve. I think we have seen enough of an incredible run of increases in short-term rates from Federal Reserve, and there is always a lag between when those rates go up and the time it takes to feed into the economy, and I think now one is going to see them feed into the economy over the next few months and the Federal Reserve will look at that data and say things are cooling off a bit - inflation isn't feeding into the system and so we can do one (rate hike) more and then take a pause.

Q: Do you think money will come back to emerging market equities before 2006 is out?

A: I think there are a number of emerging markets where the corrective risk is now priced into the markets and valuations. On a fundamental basis, they are looking good for not all markets but at least for countries like India and in India we are looking at P/E in the range of 16-17-18, which for a country that's growing this rapidly is a pretty decent valuation. I think we are at a point, when we are going to see money come back into these markets.

Q: What's your view on the dollar, do you think we are likely to see continued weakness in the current year?

A: It has been our view for half way through last year, that it was time for adjustment in the value of the dollar and we have been bearish on it and continue being bearish on value of the dollar versus the Euro and versus Asian currencies, and it will continue. Of course, data comes into play that we haven't seen yet. If inflation starts feeding into the US system and rates start going up in the US, then all bets are off.

Q: The worries of economists have been that these bouts of tightening might lead to stagflation - do you think that kind of situation is likely?

A: I think there are concerns of stagflation occurring and they are the same today as they were in 1970s and I have been talking about dangers of stagflation for 3-4 years now, because one is seeing some of the same elements come into play now, but lot of things are different as well and that is the dynamism of the global economy.

What is also different is the reduction of controls, reduction of regulation in a lot of countries and increase in privatization. So, the dynamism is much different than in the 1970s and because of that, the likelihood of stagflation is low, unless the Central bankers overdo the inflation issue and raise interest rates such that, one ends up with recessions, and that could create a much different situation.

I am hoping that the data shows there is no inflation really coming into play here and the Central Bankers can begin to relax.