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Last Updated : Jan 12, 2015 09:25 AM IST | Source: CNBC-TV18

Indian economy to outdo Sensex in 2015-2020: Expert

Vikram Mansharamani believes interest rate cut by the Reserve Bank of India (RBI) will be a big positive for banks, auto and realty sector.

The Indian economy is likely to outperform the market between 2015-2020, says Vikram Mansharamani, global equity investor and lecturer at Yale University. According to him, the Sensex has already factored in the positives expected in the next few years and appears to be overvalued.

"If reforms are implemented and we actually get the liberalisation and improvement of the structural changes that we want to see in India, then earnings will come. If the earnings come there will be a period of short-sideways movement in markets before it resumes an upward move in March," he adds.

He believes interest rate cut by the Reserve Bank of India (RBI) will be a big positive for banks, auto and realty sector.

Speaking to CNBC-TV18 from the sidelines of IAIP Investor Conference, Mansharaman says China may hot 5 percent growth in the next five years. He believes the Chinese bubble has started to burst.


Below is verbatim transcript of Vikram Mansharamani’s interview with Menaka Doshi and Anuj Singhal on CNBC-TV18.

Vikram Mansharamani
Vikram Mansharamani
Investor, lecturer|Yale University

    Menaka: If you are a global equity investor what is your current exposure to India and that will give us a sense of where you think India and its equity markets are headed from hereon? My second question has to do with the set of predictions that you have made for the year 2015 all the way up to 2020 in which you have said India will become the fastest growing large economy in the world in percentage terms that means we will outpace what China has been doing or will be doing in the next five years so talk us through that hypothesis as well?

    A: My world view is related to the global economy because that will help you understand why I think what I do about India. The global perspective has to do with the fact that there are deflationary forces brewing almost globally and it stems from what I believe was a large over investment bubble in China and that over investment bubble has burst.

    So, all of commodity complex that was supporting the supply chain to China has become vulnerable. Certain commodities are finding themselves with too much capacity and prices are falling. Now, that is generally a negative for any commodity producing emerging market.

    However, India is not a country related to the supply chain of the Chinese investment boom and the investment overcapacity. This is a positive, combine that dynamic with the election of Modi here in India and some real structural reforms that are underway, you have to get excited.

    To some extent my prediction that India will emerge as one of the fastest growing economies in the world, large economies in the world is based on a slowdown elsewhere in other countries and also the hope that some good things happen here.

    Menaka: Around 7.5 percent was the target last year, we will see the final figures when the Chinese government releases them in a short while from now but do you think they will manage to do between 7-7.5 percent?

    A: They may have and in fact on a short-term basis what China reports this year or this quarter is relatively unimportant in my world. I like to look at a longer perspective and when you look at a longer perspective the risk to the Chinese economy is down and not up and that has implications for everything that they use.

    When I talk about commodities that the Chinese investment story really has, we are talking about iron ore, lead, steel, zinc and copper. These are commodities that are industrial or investment commodities; those are commodities for which I am generally bearish because of the slowdown in China.

    In particular, even as Chinese economy slows from 7.5 percent to maybe 7-6.5 percent, I think they will hit a five kind of print in next five years.

    When they see a gross domestic product (GDP) number at that range you will see a shift of the growth rates in China away from an investment-led story towards a consumption-led story and that then ties into my world view of a consumption boom that is about to happen and that consumption boom will affect other commodities in particular, the soft commodities and energy commodities. So that is where my world view comes into play which is a shift away from investment commodities towards some of the consumption commodities.

    Menaka: What is your outlook on crude oil prices? Do you expect that we will see them range between USD 50-80 per barrel for an extended period of time, maybe a year or two or are you expecting a quick bounce back based on the hypothesis you just shared with us?

    A: Unfortunately, this consumption boom thesis doesn't play out overnight. It takes time and I think the low oil prices which we can debate, how we got here or why we got here but the blunt reality is we have more supply than demand or at least on an incremental basis supply-growth has exceeded demand growth in oil.

    It is going to reverse, the timing of which and the magnitude of which is hard to predict and something I am not comfortable putting any precision around.

    We will have oil supplies or oil-supply growth slow. When oil is at USD 50 a barrel, fewer projects make sense to pursue and that means we will have a supply slowdown.

    On the other hand oil at USD 50 a barrel means countries like China possibly India and others are going to start building reserves and start acquiring as much oil as possible and that makes sense.

    So what we are having here is the same dynamic that transpired i.e. demand slowed down because of an economic slowdown and supply boomed because of a US supply renaissance or a US natural gas and other shale based boom, those are going to reverse.

    We are going to see demand take up as prices are low and supply drop off as prices are low. So that will naturally put upward price pressure on crude.

    Menaka: When will all of these converge, in a year, two years or in three years; more likely two or three years down the line?

    A: I don’t think it is an immediate phenomenon, I don’t think this is the next three to six months type of phenomenon. I also believe the fact that Saudi Arabia and Organisation of the Petroleum Exporting Countries (OPEC) were pumping oil in the face of known over capacity and weak prices indicates that there may have been some political dynamics underway.

    The political dynamics may have been that Saudi Arabia and OPEC were trying to hurt their enemies and help their friends or adversely affect their competitors and support their consumers because at the end of the day the decision to maintain share as the Saudis have described it really helps China which is a long-term energy consumer in a big market for the Saudi Arabian oil producers.

    Like wise its hurts Russia and it hurts Iran; two effectively competitors and enemies of the Saudi regime. So, I think there is some political dynamics underway here in terms of why the decisions being made have been made in oil markets and because they are political decisions it is very hard to predict with any precision when these dynamics will unwind.

    Anuj: You believe that Sensex will do little between 2015-2020 so that is a bit of a dichotomy because a lot of people believe that it is going to be mother of all bull markets but why are you not so positive on that?

    A: The perspective I have is not necessarily it will do nothing between 2015 and 2020 but within this period of 2015-2020 Sensex will perform as well as the economy will. This is the unique distinction I want to clarify so that there is no confusion.

    I am as optimistic as one can be for the underlying economic outlook for India. India's economy with structural reforms and the lower commodity prices this is wonderful; I can not imagine a sort of better economic environment.

    However, I also have to say that the Sensex has priced a lot of that perfection into the prices already. So as a result we will get the earnings growth that lots of people are projecting, we will see the economic growth that is anticipated and earnings multiples which are elevated relative to other emerging markets countries will compress. So you have this crisscross where earnings will rise, valuations will compress and net-net is we may go sideways for a little while.

    I do not think it is a five year sideways thing, it is the immediate visibility of sideways. However, in the long run it will ultimately matter what happens with earnings and that will be the ultimate driver.

    So if these reforms are implemented and we actually get the liberalisation and improvement of the structural changes that we want to see happen in India which the entire world, the entire Indian population globally wants to see happen if that happens then the earnings will come and if the earnings will come there will be a period of short sideways movement I believe in markets before we resume an upwards March.

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    First Published on Jan 9, 2015 03:51 pm
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