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India remains best long-term bull story among EMs: CLSA

Published on Fri, Aug 24, 2007 at 19:45 | Source : Moneycontrol.com

Updated at Sat, Aug 25, 2007 at 13:19

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Q: What about the latest bout of uncertainty in India which has pegged us back and forced us to underperform in the last few days, the political uncertainty factor? How big a factor is it for you as you look at India?

A: That is not a very big factor to me. That is just a reason to buy India.

Q: You wouldn't be ruffled at all?

A: Right now I wouldn't be, in the longer-term it is a buying opportunity. My basic assumption is no major political party wants an election this year, which is what everybody seems to tell me and that conclusion would also be encouraged by the events over the last 24 hours. So, the big picture if Indian share prices have fallen more because of political concerns, which are not going to materialise, that is just another reason to buy Indian equities tomorrow or the next day.

The most important positive fact for India though domestically is the fact that the US economy is now slowing, that the commodities are likely to correct more, and in my view it will be a matter of time before the Reserve Bank of India declares victory in its monetary tightening campaign. I think the Indian central bank needs to be congratulated on a very intelligent preemptive tightening, which in my view has succeeded in cooling down the credit cycle here without blowing it up and in my view that will allow for a longer credit cycle in India in the coming years precisely because the RBI has been healthily preemptive.

The RBI targets credit growth and asset prices unlike the Federal Reserve. So, it sensibly started tightening when credit growth got too strong. If the US central bank had done something similar, they would not be having the problems they have now in the housing market and the Federal Reserve would not be having to bail out institutions and lend money against dodgy collateral, which is what it has now been doing.

Q: So you don't agree with the view that because of this lingering political uncertainty, India can underperform in the foreseeable future some of its regional peers as it has for the last week?

A: A week is such a short time; it is not even worth paying attention to. The bottomline is India remains the best long-term bull story in global emerging markets because it has the best companies and it has a domestic demand driven growth model, which means it doesn't blow up if the US consumer stops spending.

Q: You would buy India on any dips or has it corrected enough for your liking to go out and buy big time now?

A: If I were a long-term investor, I would buy India tomorrow. If I am worried about the next three months, I might want to wait a bit.

Q: What do you expect the RBI to do next? You spoke about how it has dealt with the situation now; do you expect them to start cutting rates as early as the end of this year then?

A: No. I expect the RBI to indicate that it has basically finished with tiding and moving, start cutting rates. But you already see the deposit growth running more quickly than the loan growth in the Indian banking system, which suggests to me there is room for the Indian banks to start cutting rates. But the key point is I think they are going to stop tightening.

Q: What about earnings? Do you sometimes worry that Indian earnings might start slowing down after two years of tearaway growth and could that restrict outperformance or further PE rerating of this market for a while?

A: From a macro earnings standpoint, I think the key issue is, does the investment infrastructure cycle continue? Fixed capital formation as a percentage of GDP is now running well over 30%. India has got Chinese style investment GDP ratios. You only have to look out of a cold office window to realise that India needs the investment and my basic view is that investment cycle is going to be running for the next 10 years. And that is the key reason why I think the earnings growth and GDP growth in the next 10 years in India will be running at the 8-10% level and that is why the market is not expensive.

Q: If that is the view of the economy and the market, where do you see the Indian currency then because it has just pulled back a bit after appreciating continuously?

A: Well, short-term I think the currency will pull back a bit more because I think the dollar is in a bit of a countertrend rally. But long-term investors; companies need to assume 3-4% annualised appreciation in the Indian currency.

Q: We are not terribly exposed to the US, but if there is one sector, it is Information Technology and it is now being slammed because of those concerns. Would you subscribe to the markets concerns, apprehensions on that score?

A: These are great companies, but yes clearly there are concerns relating to the currency, relating to the fact that these companies are going to get taxed more, and also the perfectly legitimate concerns relating to the fact that a lot of the revenue and hence profits of these companies are derived from their contracts with the US and European financial sector companies. And if there is any area in the world whose earnings are going to get hit right now, it is the US financial service sector companies because they have been making most of their money off securitisation and the securitisation activity is going to slow dramatically. So, yes, I would subscribe to those tactical concerns.

Q: So, despite the recent underperformance, you are still not a buyer of Indian IT stocks?

A: Well no. But I don't look at India as an export story; I am playing the domestic side of India. I always have though.

Q: Yet you have chosen to drop one of your favourite sectors from your model portfolio, you have chosen to switch out of Unitech and include Bharti? Why did you do that, what has changed in Indian real estate?

A: It is quite obvious that in the short-term, the Indian property has got to navigate a few more problems, because it seems to me that there is a lot of supply, and it seems to me that some of the prices are going to come down in the short-term and these big property companies are trading on very small discounts to NAV. But that is just a tactical issue. In the big picture, the Indian property story remains a very exciting one. All I am really doing though is switching one domestic demand story for another.

Q: Just because valuations have cooled off a bit in telecom or you have become more bullish on the telecom cycle as such?

A: Bharti has always been a tremendous story. It is more an issue of more near-term turbulence in property.

Q: What is your prognosis, next three to four months, do you expect Asian emerging markets to get back to old highs or is that being too optimistic?

A: I think if the Fed eases, you will see Asia trading in the next four months back at the old highs. But you might get a bit of a V shaped bottom in between time. I think already that China stocks are almost near the old highs they were before this recent correction.

Q: You have got about 10% to go, do you think India can also climb 10-12% in the near-term to get back to highs?

A: Well, in four months, they can, yes. But I am assuming Fed easing happens in that period. If I am wrong on that, then it is less likely. But my basic assumption is that the Fed will be easing in that timeframe you mentioned.

Q: Would that be good enough to start another bout of emerging market outperformance?

A: Emerging markets in Asia have been outperforming since basically 1998 and they are going to outperform for 20 years. That is just an ongoing constant.

Q: So, are you bullish or bearish now on Asian emerging markets including India for the rest of 2007?

A: Personally speaking, if I was trying to manage money on a one-month view, I wouldn't be investing all my money in Asian emerging markets right now. If I am managing money with a five-year view, I would invest it all tomorrow. It all depends on your timeframe. Personally, investing on a three-month point of view, is basically nonsense, I wouldn't really talk about it.

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