Economic growth warrants higher int rates: ABN Amro

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As the Budget draws closer, Paritosh Thakore of ABN Amro India Equity Fund shares his perspective on how markets in India are likely to take shape. According to him, the danger of inflation is picking up further in India.

 

He feels that Indian interest rates are too low, given the economic growth rate, and that the RBI might have no other alternative but to hike rates.

 

He believes that investors may need to book some profits in India.

 

Excerpts from CNBC-TV18's exclusive interview with Paritosh Thakore:

 

Q: How are you reading the interest rates concerns that have been cropping up, particularly for our market and what that might mean by way of fund inflows?

 

A: If you look at it from a positive aspect India and Indian market is benefiting from abundance of global liquidity and carry trade, which continues to be very vibrant. But talking or focusing on the domestic interest rate scenario in India, one needs to look at the whole structure and say that interest rates are probably too low at the moment given the strong growth that we are seeing in the economy in India; I understand that now it's at about 9%.

 

But in my view at least, India really faces a supply constrain; demand is still very strong and the momentum is strong. But given the constraint that we are seeing on the supply side, there is a real danger that inflation continues to pick-up even in an environment of subsidised oil prices and subsidies that are in the economy.

 

So at this point, you would have to take a view that the authorities or the regulators will have to harden and take tightening steps. When that comes about, what measures those specifically are remain to be seen. But the corollary of that also is the valuations that are prevailing in the market today. And at around 20 times earnings, I suspect that a lot of the good news is already in the price for a number of stocks and sectors. So from where we stand and from where we look at the market, even on a regional basis, we would expect that there would be a correction in the near-term.

 

Q: How do you gauge global liquidity though? Do you continue to see so much money sloshing around over the next quarter into a market like ours and other Asian markets?

 

A: A lot of that is driven largely by the yen carry trade. A couple of months ago people were expecting that valve to be shut somewhat. But what we have seen in the last few weeks and months also, is that the rumours of that demise are have been grossly exaggerated.

 

So, for as long as that situation continues, perhaps you will not see the immediate catalyst of a reduction in liquidity. But as it continues over time, the risk of a reversal obviously grows. And that is what we need to focus on now as we invest money in the stock market whether it is in India or other markets in the region.

 

Q: What has been your own experience with the fund that you are running in India? Because of this out-performance, are you seeing redemption, or conversely, is it easier to raise fresh money for the India fund?

 

A: We have seen some phenomenal growth in our fund. We started about USD 60 million just a year and half ago and today we are in excess of USD 700 million. So our institutional investor base is stable and also keen to get participation in the Indian equity market. But that was at a time when valuations were looking far more attractive than they are now.

 

So I would sense that over the course of time investors will take another look at the asset allocation and perhaps also look at the premium that is being paid today for risk which is very low and perhaps also take a view that it might make sense to take some money off the table and look for a better investment opportunity.

 

The long-term story in India continues to remain fabulous; the only issue right now is what are we paying for that long-term story.

 

Q: What have you been doing as a fund manager? Have you been taking same money off and creating a bit of cash buffer to guard against such kind of redemption requests or do you remain fully invested?

 

A: It's fair to say right now that we are at the higher end of the cash that we allow ourselves. Our aim is to be fully invested but we have some flexibility in how much cash we can have in our portfolio. So I have deliberately over the course of the last few weeks, raised the cash level not so much for redemption activity but looking for better entry point in the market.

 

Q: Not for specific stocks but is there a sector that you might have increased weightage to, given what you saw in earnings this quarter?

 

A: We still follow the same philosophy of trying to identify opportunities with identifiable earnings growth. The way we look at the market in India is with the strengths of the economy, and that remains in consumption and in the investment side. So our stock picks will be focusing on companies that benefit from those two structural themes in the economy.

 

Q: If there is to be a correction - and you made the point about seeking a better entry point for that cash - what could trigger it? Do you think valuation pressures by itself would be sufficient, or does it needs to be a global trigger like the one we had in May?

 

A: There is no immediate catalyst on the horizon for a correction in my view. It is hard to pinpoint anything that would lead to a sustainable correction. But as you rightly point out, the events of the last summer happened very quickly; they were driven by global events and it's not outside the realm of possibility that you could see a similar kind of event obviously which may not result in such a sharp downward movement that we saw last year. But nonetheless markets have been percolating at quite high levels due to liquidity inflow and its quite healthy in my view to see some kind of a pullback.

 

Q: Anecdotally have you heard of any new money been raised for India or for the emerging market basket?

 

A: Flows generally have been good in the emerging market space also in the India equity funds space I think our fund and our peer group are all seeing healthy inflows. So by and large that is not an issue right now money like that has to be put to work and that's what we are seeing today in the market place.

 

But as you may know it's actually the rate of change and it doesn't really take much to change investors' sentiment. But right now I see no clear reason why that would happen at a short run, but as valuations pick up and as momentum continues to be strong the risk over reversal also increases.       

 

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