Hong Kong based independent economist Jim Walker, who founded Asianomics Ltd places India high up in his conviction list saying Indian equities will see unprecedented growth in next 5-10 years during which period the government will get its act together and interest rate trajectory will trend downwards. He believes the current bull run will continue until 2018. Walker is expecting the Reserve Bank of India (RBI) to cut a total of 100 bps rate cuts in 2015
Speaking to CNBC-TV18, Walker said India remains on top of his pecking order followed by Phillipines. "China is just an overheated market," he says of the market which has been a preferred pick of many institutional investors. He argues the dragon nation's gross domestic product (GDP) as well as property market rates are slipping.
Below is the transcript of Jim Walker’s interview with Sonia Shenoy and Latha Venkatesh on CNBC-TV18.
Sonia: Sitting in Hong Kong, what is the sense you are getting about emerging markets like India? Have we lost our favourite emerging market tag?
A: One of the real problems with India at the moment is the RBI, which does not seem to get the message at all when it comes to inflation, which is a bit of a pity for a Central Bank and given its decision last week on the 25 basis points (bps) cut and then signalling that was enough for now. That is enough to put anybody off and there is no surprise that foriegn investors are selling especially when they see what has been happening in China.
Latha: At the moment, we are seeing a bit of selling in all emerging markets and to some extent that perhaps is because of rising US and European bond yields. Is not that one of the reasons why money is flowing out?
A: I am not sure that that is why money is flowing out. As I said that the moves in China over the course of the last year are beginning to suck money of other emerging markets. It is the usual thing here that of course fund managers have missed the boat on China. A lot of them cannot get money into the A-Share markets. So, what they are now trying to do is buy Hong Kong, buy A-shares by Chinese companies listed in America. And of course to do that, they have basically got to sell other emerging market stocks.
So, there is a bit of a rebalancing going on as fund managers trying to make themselves look good having already missed the boat. It is a good opportunity for them in the long-term to buy intro other emerging markets. But at the moment, sentiment is pretty sour and not so as you say quite a bit to do with what is happening in the developed countries where policy is a complete mess.
Latha: What is your pecking order within Asia or within the emerging market basket?
A: My pecking order has not changed at all. Top of the line would be India despite the RBI and more because of the government. The Philippines, Indonesia and Taiwan, these would be right up at the top of my list, but particularly India and the Philippines.
Sonia: So, India and Philippines continue to be the top market to invest into. Today the Morgan Stanley Capital International (MSCI) will decide whether to add the China A-class shares to the emerging market basket or not. Should Indian investors be worried about this at all?
A: Again, it would only be on a rebalancing basis and of course it would not happen overnight. The China stocks have run in a very crazy way as they tend to do. They are now hugely overvalued for the fundamentals in the Chinese economy. Everything in China is going up in the stock market and everything else in China is going down from the real of growth of the economy to the property market.
So, these are the delinking of fundamentals in the stock markets that never lasts for long and when you look at the way the stock market has moved in China, you know well that there is a crash coming.
Sonia: You have had unending faith in the Indian market for a long time now, we were just speaking with Morgan Stanley a while back and they said that they expect the Sensex to hit that 30,000 level next year. What would your own expectation be of what returns one can see in the Indian markets in the next 12 months?
A: I agree completely and I am very confident that the Sensex is going to start moving up again. I think it will come much more quickly if we get to the point where the governor of the Reserve Bank of India’s term has finished and he is replaced by somebody more sensible.
In the meantime, the fact is that the Indian economy is relatively steady. The government is doing a lot of the right things and we have a business cycle to look forward to over the next five to ten years in India, which is a pretty powerful one. It is just pity that there is no help from the monetary authorities.
Latha: Even the earnings season that just concluded did not give us much by way of an earnings growth up-cycle. Which quarter would you see it turn up?
A: I would be expecting that we have seen the worst in India in terms of the earnings cycle. I think companies have been repairing their balance sheets for the last couple of years. Banks are pushing non-performing loans (NPLs) into the picture now. So, we are seeing bank earnings squeezed as they try and load up the non-performing loans. That loading up process will come to a halt and the next quarter or so, we will begin to see a recovery in bank earnings.
The economy has already stabilised but it could do with a little bit of a helping hand from both the government and the Central Bank. But this year is certainly the bottom of the earnings down cycle and we can look forward to much better prospects over the coming quarters.
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