Why Deutsche Bank prefers India over China?

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The markets sold off on Friday on the back of weak overnight cues from the US, and growing concerns that Greek's sovereign debt situation may spread to other European nations like Spain, Ireland, Italy, and Portugal.

 

However, Ajay Bagga of Deutsche Bank says the European fear is a bit overdone and markets will see a pullback from here on. "In fact, foreign investors are talking of increased exposure to emerging markets."

 

So, is India or China a better bet from the emerging market space? Bagga prefers India. He says, "China is looking at a huge overvalued market with government talking about stopping stimulus. In India, there will be a lot more measured stopping of stimulus. There are key kick in factors like disinvestment which could bring some relief on the fiscal situation. Hence, the situation in India is better than in China where a huge stimulus of nearly 12% of GDP came in and there is going to be a pullback in bank lending."

 

He expects the capex cycle to kick in by June-July in India. "The Chinese capex cycle is already over heated. If anything, they will try to slow it down or otherwise they will let it run."

Here is a verbatim transcript of an exclusive interview with Ajay Bagga on CNBC-TV18. Also watch the accompanying video.

Q: How are you reading this European news? Do you think it has the teeth to scar the markets big time or is this just an excuse for an overdue correction no more than that?

A: It was just a catalyst for a correction that was coming. The size if you see Greece has to kind of re-negotiate about USD 75 billion of loans. Portugal and Spain are in a better position than Greece on a relative scale. Spain definitely is much bigger economy as well. I think it is overdone. In November, Dubai market reacted for a week and then we saw a sharp pullback in the markets.

To blame are the European situation is well know ever since the socialist government came to power they announced how the accounting forgery was working in Greece. So it is not something new as such but the fear of contagion is there. This is really spooking the markets but it is overdone and you will see a pullback from hereon.

Q: The worst of the correction is behind us. Will the market work a recovery rather than weakness?

A: As far as the European news flow goes, the take of emerging market flows drying all those things are getting overdone. Definitely, the fundamental growth in emerging markets when we talk to foreign investors is talking about increasing allocations into emerging markets. If you really look around the graph of the global GDP growth, India and China are really stand out as out layers in terms of growth.

China is looking at a huge overvalued market with government talking about stopping stimulus. India will be more measured stopping of the stimulus. There are key kick in factors like disinvestment which could give some relief on the fiscal situation. Hence, the situation in India is better than in Chinese where a huge stimulus of nearly 12% of GDP came in and there is going to be a pull back in bank lending.

In India we have so much liquidity on the sidelines if anything we are now seeing banks now cutting rates and trying to get corporate. In India the capex cycle has to kick in. It will kick in by June-July. The Chinese capex cycle is already over heated. If anything they will try to slow it down or otherwise they will let it run. Hence, it is just relative between the two but if you take it relative to the world these are sweet spots. At these levels, the markets look extremely very compelling valuations. They might go down a bit more just on the liquidity but believe me these fundamentals are going to support a pull back in the markets.

Budget might or might not lead to a recovery. It is not known what is there in the policy document but that is going to be a minor aberration. The big catalyst this year will again be the monsoon. We cannot afford and the failure in the monsoon if that is even near normal then you will see this market coming back very strongly.

Q: How would you approach the space capital goods and infrastructure?

A: From a more fundamental perspective and more medium term, I would say counters because they have got hit so badly become bias. In our model portfolios, we have L&T and BHEL , counters look weak. From a technical perspective, Thermax will look like the run is over but if you look at the fundamentals and the negative news flow that is come in especially on L&T with their third quarter results, a lot of that has got baked in on a fundamental perspective. We are bias on this story.

Q: How would you approach some of these high beta spaces like the metal pack for example?

A: Metal has seen a very strong correction in her underlying prices be it copper, aluminium, or ferrous space. Hence, a lot of that over valuation, over hang has been corrected out, but these are high beta sectors. However, if your thesis is that capex is going to revive in India you want to play more the domestic story so we hold positions in SAIL because it has really not impacted by a rising coal price because of captive mines. That looks a pretty good story. That is one of the metal stocks that we are positive on.