Relax! India will outperform by year-end: Credit Suisse

Indian equities have had a rather unexpected wobbly start to 2013, after showing remarkable resilience in 2012. This shakiness, according to Sakthi Siva of Credit Suisse, has to do a lot with investors booking profits on their investments. "Personally, my own strategy is to buy the dips. So with recent correction, we are highlighting India now as one of the four cheapest markets in the region," she told CNBC-TV18 in an interview. 

This is the fifteenth time since 2000 that India has made it to the "cheapest four" list of Credit Suisse and 13 of the 14 times India has outperformed. "I am quite confident that India by the end of the year will actually be a major performer," Siva says.

The only concern Siva has with India is that foreign investors have put in too much of money into the market. Out of the USD 13.5 billion worth of flows coming into the emerging market basket, 60 percent came into India. "We are already quite crowded and you have had a 25 percent return just the last year. It is always difficult for you to perform straightaway," Siva reasons.

Also Read: Positive on Indian mkt; see growth pick-up ahead: HSBC

Below is the verbatim transcript of Sakthi Siva's interview on CNBC-TV18

Q: How have you read India's movements in 2013 so far, because after a good performance in 2012 it has been a bit of a wobble?

A: Yes, it has been rather disappointing but a lot of that is also a bit of profit taking. My own strategy is to buy the dips so with recent correction we are now highlighting India as one of the four cheapest markets in the region.

Q: What do you think has caused it, is it the fact that people just owned a lot of India going into 2013 or were these specific macro triggers might have caused it?

A: One concern, it is an overbought market by foreign investors. This year we had about USD 13.5 billion go into emerging Asian, China but USD 8.5 billion has gone into India alone. So India, even this year has got about 60 percent of all flows. When we are already crowded and you have a 25 percent return just last year, it is always difficult for you to perform straightaway.

With the dip and with India now joining the cheapest four markets, on our models this is the fifteenth time since 2000 that India has joined the cheapest four. If you look at the last 14 times, 13 out of 14 times India has outperformed. I am quite confident that by the end of the year, India will be a major performer.

Q: We haven't seen too much money go out here though from the foreign side of the USD 8.5 billion. Do you think we could still be vulnerable to some more technical pressures?

A: If India continues to underperform then there is always pressure when you are overweight on a market and it underperforms then there is a risk. However, we are hoping that with the earnings revision starting to flatten out, yes, the Budget headline was good but the composition with the expenditure increase was a little bit disappointing to some investors.

Our view is particularly with regards to India, Indian tech for example looks interesting. As a house we have put out a series of notes today to highlight Indian tech as a key buy sector.

Q: Is there any disenchantment about growth that 4.5 percent has caused a lot of consternation back home and this quarter may not be great either? Could that worry some of the people who loaded up on India over the last six-nine months?

A: For India yes, 4.5 percent is a low number. However, what we tend to look at more than GDP is earnings and earnings revision is starting to flatten out. So they are not rising which will be the best scenario but at least we are starting to see a slowing in rate of earnings downgrade.

If we add January and February together, the revisions are flat. Now the upgrades have been driven largely by the IT space as we have had a weaker rupee but business spending, corporate capex have also started recovering. So, those are some of the things that will drive the market higher despite the weak headline GDP number.

Q: Is the rupee something that keeps coming up in discussions because it takes away so much of gains made from India for the foreign investor? Will the current account deficit (CAD) which is persistent and the fact that the rupee keeps coming back to 55 go against investments there?

A: The Indian rupee the day after the Budget when there was disappointment may be with the pace of consolidation, the concern is the current account resurfaces and the rupee started to weaken. It also depends on how you position within India. IT is beneficiary of that. It is not that we only like IT, we also like Tata MotoCorp, Reliance Industries in the past, but with the US corporate capex numbers starting to turn, so just in the last one week we have had a 6.3 percent rise in US what we call nondefense capital goods order, one of the best leading indicators of corporate capex.

Last Friday, we had the US ISM, new orders numbers pick up quite strongly. These are all good indicators of a recovery in US corporate capex and our view is Indian IT is the best way to play that.

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Q: Adequately captured in valuations because it has outperformed the market by quite a margin or can you still buy names like Tata Consultancy Services (TCS) and HCL Technologies?

A: I am very valuation driven so I do struggle with TCS, which is trading at quite a big premium. The stocks that I have added to the regional portfolio are HCL Technologies and Wipro. The premiums on those stocks are much more modest compared to TCS. This is a feedback I am getting from a lot of clients today. Year-to-date it has but last year, it was one of the worst performing sectors. On a two months frame, but I will still take a longer timeframe. I am quite happy to add even though we have missed two months of outperformance, it was also a major laggard last year.

Q: In case of Wipro, are you sure about the performance turnaround because valuations are compelling, now performance has not been up to the mark for the last many quarters?

A: Our analyst turned a bit more constructive on Wipro even on the operational side about 2-3 months ago. On valuations it is trading like HCL Technologies on a 20 percent premium to the region and to put it into perspective TCS that always delivers is trading at a 155 percent premium to the region. So, to me you get what you pay for, to some extent expectations in Wipro are quite low, expectations in TCS quite elevated.

Q: Big call at the start of the year was cyclicals, they started off well but then in the correction in last four weeks have got whacked quite a lot, are you sure you want to hold on to that given the nature of the volatility that has crept into the market?

A: We are still keen on Tata Motors, Reliance. I do not know whether you consider HCL Technologies and Wipro cyclicals and therefore, we are sticking to that strategy.

The reason the cyclicals have been whacked is that they have performed very strongly particularly in the second half of the year. We are finding that in the markets where cyclicals performed very strongly in the second half of the year, which was India and China, the cyclicals have been whacked this year.

In Korea, the cyclicals which did poorly last year are doing very strongly this year. So, there is always a price for everything. If they won, we need to take profits and not chase the cyclicals if they run too hard but certainly on dips like this, we would continue to suggest buying the cyclicals.

The risk to the call is that India is a crowded trade so whether additional money can come in, whether there is a further deterioration that current account that drives on the concerns about the currency, the fiscal situation but for me the biggest concern remains the fact that it is still in our view a rather crowded trade.

Q: Large country dedicated funds do not seem to have got a lot of money, they say, it is the emerging market funds that upped India weightage through 2012, do you think from where weightages stand today, there is a risk of a bit skimming down given recent performance or will that money not come off?

A: Two types of money appears to have come into India, one is sovereign money and that is quite sticky.

The other is the ETF money which is the hot money that can leave if India does not perform. We are hoping that people can stomach two months of not performing, but we are right and India starts to perform, even that hot money may choose to stay.

I often get complain that money has gone into ETFs rather than into the funds. But when a cycle starts initially the money tends to go into ETFs and then only later into active funds. So, we feel that maybe with a bit of time even the active managers may receive more by the way of inflows.

Q: What do you do with the whole infrastructure focus side in India because stocks like L&T, BHEL have been performing quite miserably over the last few weeks? Would you buy them or do you think that is still a difficult call to make?

A: It is still a difficult call to make. If the Budget had done more to address some of the infrastructure concerns, we would have started pushing some of those names. BHEL in particular is looking quite attractive on valuations at this point but the Budget seems to focus more on raising expenditure for the poor. So, it is still more consumption driven rather than investment driven. We would like to see more action maybe on the investment side. Another catalyst could be if the RBI steps up their rate cutting.

I know the governor has gone to say that inflation is rather sticky, but we tend to use a three-month moving average for inflation which is a leading indicator. On that basis, the wholesale price index (WPI) has already come down substantially to 2-3 percent. So, we are bit more relaxed about inflation and therefore believe that there is more room. If we do see further rate cuts then again that may help some of these investment related stocks rather than the consumer related stocks.

Q: Reliance flared up for a bit post the results which were good but then has gone to sleep at around Rs 800 again. Everybody knows that it has tried investors’ patience over the last two-three years. Are you convinced that this is going to be the big come back here for Reliance?

A: Again, because I am valuation driven, we added Reliance in January of last year, same time as we added Tata Motors, January 3 last year. Reliance, we added because the price to book is below 2008-09. If I look at the region, there are only two stocks in the region where price to book is still below 2008-09. So, not just in Indian context but even in Asian context, Reliance certainly on the valuation basis looks attractive.

Bottom up analyst also feels the stock is starting to deliver. We have started seeing earnings upgrade. We hope investors will notice the change in fundamentals and the stock performs a bit better than what it has done so far.

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Q: What are your expectations from earnings in general because the quarter that went by was quite patchy? Many companies disappointed. People have been trying to catch this trough for a while that this is the bottom after which upgrades will start. But for the last six months it seems like it is an extended trough. Why we haven’t started seeing the upgrades yet?

A: If you look at earnings revisions in India, January was up, February was down. We are quite confident that we would see earnings upgrades. Just today, our analysts have further upgraded Indian tech earnings revisions particularly for some of the bigger stocks like TCS as well as Infosys. So at least on the tech side, you are seeing earnings upgrades.
Financials, certainly there has been a bottoming. Some of the energy stocks are starting to see earnings upgrades as well. Overall, we are closer to the bottom and may see earnings upgrade over the next few months.

Q: What's the biggest risk to your hypothesis that this correction is to be bought in India?

A: The biggest risks are firstly global. If we do get a resurgence of European concerns, it is always difficult for Asia, not alone India to perform. Secondly, we have the US Budget sequestration. If that leads to a pull back in the US data particularly capital spending, not just pull back in India but also a pull back in Indian IT that we are pushing quite hard and so those are two global risk factors out there.

What is India specific, there is still concern that it was one of the better performing markets last year, certainly among the BRIC's, by far the best performing. Whether you get bit more of this consolidation period before we do get the next leg up, macros specific factors, inflation, it has come down but maybe the year on year numbers remain more sticky so we don't get the catalyst in the form of rate cuts.

We are always hoping for a bit more on the policy front. Little bit disappointed by the Budget. It would have been better to see a bit more on the infrastructure on the investment side rather than just consumer related programs and those are some of the risks.

Q: Do you still hold that this could be another year of 20 percent plus gains or that view needs to be tweaked a bit in the light of the recent fall?

A: We are still sticking to the view of 20 percent gain. Last year, most of the gains came in the fourth quarter for us. We are hoping we do not have to wait that long to get the 20 percent return. We are still looking for a target of 650 for MSCI Asia Ex-Japan which is a 20 percent return.

Q: What is your call on China? It started creating a lot of apprehension in the region after its recent fall in property shares. In an Indian context both in terms of what it could do to commodity stocks and this pool of money swirling between China and India what ramifications could it have?

A: The China, like India started the year very well. It was up 6 or 7 percent in the first three weeks and then it has rolled over. The big surprise including for ourselves has been the fact that they have started to tighten. We did expect tightening, but not so quickly. We think this is pre-emptive tightening that in the short-term is seen as negative for markets and commodities, but if it is successful in engineering more of a soft landing over the longer term, it is quite constructive.

The mistake in 2009 was to tighten too slowly and they are trying to rectify that by tightening quite early. The property stocks have fallen because you have tightened quite quickly over the weekend they announced further measures. Like India, we are suggesting buying China also on the dips and there is now report today not only has India joined, but also Shanghai has joined the cheapest four at the same time. So, we are suggesting both markets do look attractive.

Q: Do you think it is possible that after a good 2012, 2013 turns out to be an off year for emerging markets and then it starts building again in 2014?

A: After a 20 percent return there is always a period of consolidation. Maybe what we are seeing at the moment is that period of consolidation. The risk that we do not get a 20 percent return is if we get European concerns, the tail risks starting to flare up again, emerging markets unfortunately always perform poorly if there is a risk-off trade.

Secondly, if the US Budget cuts have a big impact on the US economy and we get a slowing that is again quite negative for emerging markets. Then we do see emerging markets tightening while developed markets are not and policy is very easy, that could be another reason for us to underperform.

Given the valuations and we like Asia and some parts of Europe, Middle East and Africa (EMEA) within Global Emerging Markets (GEM), the backdrop is still rather supportive. China has tightened earlier, but we construed this as pre-emptive tightening which is better for the long run and may not be that great for the short run. So there are certainly risks, but we are known to put our necks out, so I am very happy to stick with our call for a 20 percent return.

Q: What would you tell your clients to buy in India aside from IT, Reliance and Tata Motors? What else is the India basket looking like?

A: We are also suggesting some of the banks like Bank of Baroda (BOB). If we are right that inflation is cooling, rate sensitives like the banks tend to perform and that is the stock that the analyst Ashish likes. Those are the five names. I do India in a regional context. Five names take you to an overweight position.