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The view on the India growth story is unarguably bullish. Kevin Watts, Country Head - India, Bank of America-Merrill Lynch believes that the Indian markets have a good growth story and a structural story. He however feels that the Indian markets have had a very good rally this year and are fully valued relative to other Asian markets. "I would be looking for a period of stability here. I don't see a further radical appreciation in the market for a period, and not until we get through some more earnings growth."
Speaking on the sidelines of the World Economic Forum, Watts said M&A activity will pick up and rebuild during fiscal 2010-11. He doesn't expect very strong growth for a long period in most western economies as they are largely dependent on the consumer.
Commenting on the interest rate picture, Watts said, "I think from an India point of view, the biggest challenge is managing the domestic stimulus package and interest rate policy against probable exchange rate pressures. The exchange rate area is an area that the government will certainly have strong views about." He however added that, "In India, reserves have built again over the summer. So the government has got fire power here."
Here is a verbatim transcript of CNBC-TV18's exclusive interview with Kevin Watts:
Q: There are still uncertainties about whether you are out of the recession or not?
A: I think the US is technically out of a recession because it grew in the last quarter. The UK isn't. But I think these are technical terms. My view is that there will not be a lot of strong growth for a long period in most western economies because these economies are very dependent on the consumer.
Unemployment rates are very high, jobs are uncertain, and the balance sheets of households are severely impaired at the aggregate level. This is not a recipe for a fast consumption growth which will drive those economies. There is a lot of capacity under utilization as well. So however you look at the fundamentals we may have growth and hopefully we will have growth quarter to quarter. But the economies are not well-positioned in the west.
Q: Does this really mean that the interest rates would remain more or less at the current levels; you don't really seeing an interest rate upturn atleast in the OECD, Europe and America?
A: For the time being they are likely to remain extraordinarily low. What will challenge that is probably exchange rate movements. I think from an India point of view, the biggest challenge is managing the domestic stimulus package and interest rate policy against probable exchange rate pressures. It's very difficult to judge how extreme they would be and almost in which direction because we saw a rally in the dollar in the middle of the crisis.
Everyone is now expecting the dollar to weaken because of the scale of the liquidity that has been pushed into the dollar market. It is actually difficult to judge how much, how fast and even in which direction it will go from week to week. So, I think the exchange rate area is an area that the government will certainly have strong views about. But in India, reserves have built again over the summer. So the government has got fire power here.
Q: India has recently gone in for a gold movement as far as the IMF is concerned. A lot of people are reading that as taking a view on the dollar. Going forward do you see the dollar weakening?
A: The consensus is that it would weaken from here on; the consensus is that the dollar standard is may be going to become less of a fixture in the future. But these trends take decades to play out. I am British and when I first worked in the finance ministry in the UK Treasury when I left the university, this is in the mid-70s; we were dealing in the mid-70s with consequences of the Sterling as a reserve currency, even though it didn't have the economic power or ability to be a reserve currency for decades prior to that. So these trends take a long time to work out.
Q: You don't see the dollar under threat as a reserve currency especially from Chinese currency?
A: Under threat; in 40 years' time the Renminbi will be a reserve currency. I don't know when between now and 40 years it will be a reserve currency. The rupee is likely to be a reserve currency in 40 years' time. That's a feature of economic power be balancing between the west and the east that we talk about. That will have many consequences and it will have a consequence on the reserve currencies of the world.
But I cannot predict when between now and 40 years' time, we will all say the Renminbi is a reserve currency and the rupee; both currencies have exchange controls in place at the moment, which have a big impact on the development as foreign exchange.
Q: Would you now say that M&A especially cross border activity will pick up going forward, in fiscal 2010-2011?
A: There is some pickup in M&A activity and it will continue to rebuild. The main challenge for M&A activity is sellers and buyers accepting the pricing. So where markets have adjusted, market prices are very different, for both seller and the buyer other than in distress situation but where it is not distressed, you have to accept the pricing and that's about time acceptance of the future and the uncertainties about the future that we have just been discussing.
Q: How do you assess current valuations in Indian markets, do you think they are at par or slightly over valued? Do they reflect the fundamentals?
A: It is very difficult to know when you are in equilibrium. One thing that the last few years have taught us is that it is so difficult to judge when you are in equilibrium. What I would say is that the Indian markets had a very good rally this year. It looks fully valued relative to other Asian markets. India though has a very good growth story and a good structural story.
Q: Do you think the P/Es are fine as of now?
A: I would be looking for a period of stability here. I don't see a further radical appreciation in the market for a period and not until we get through some more earnings growth.