Indian market expensive but good long-term growth story for investors: Geoffrey Dennis

The US Federal Reserve on expected lines raised key interest rates by 25 bps on Wednesday and guided for a gradual increase. It will be extremely beneficial to the emerging markets which were fearing a more hawkish stance.

The Fed increased the interest rate by 25 basis points to a range of 0.75 percent to 1.00 percent on strong macroeconomic data and confidence in inflation which is rising to central bank’s target.

"This is an excellent scenario for emerging markets. We did not get an acceleration of rate increase which the people feared could happen from Fed meeting. It looks like Fed wants to increase rates, but is little nervous," Geoffrey Dennis, Head of Global Emerging Market Strategy at UBS said in an interview with CNBC-TV18.

“This is like a goldilocks scenario for EMs. Although we are not wildly bullish on developed markets because we are concerned about valuations. But, EM valuation is not particularly stretched compared to developed markets,” he said.

One reason which works in favour of EMs is the mild pick-up in global economic growth. If the growth would have been rapid then it would have posed a much more challenging environment for EMs.

The FOMC expects economic conditions to evolve in a manner that will warrant gradual increases in the federal funds rate. The federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.

"We are not wildly bullish on the global economy and that is one reason we think that EMs will do very well in this environment. If the global economy would have picked up more rapidly it could have posed a bit of challenge for EMs in terms of higher bond yields and that’s how Goldilocks works," he said.

Commenting on India market, Dennis said that India market is a little bit expensive but the way I look at it, India is one of the growth stories.

The election results have given a green light on the political front which is positive for the market. "While we worry about valuation in the near-term it looks a very good long term story, " concludes Dennis.

Below is the transcript of Katalin Gingold's interview to Sonia Shenoy, Anuj Singhal and Latha Venkatesh on CNBC-TV18

Sonia: The global set up looks like it is a goldilocks scenario now with that Fed rate hike out of the way and most global markets in risk-on mode. But how did you read into the event that took place overnight and what would your own view be on the markets going ahead?

Gingold: Definitely, the Fed is guiding for a gradual hiking cycle and Yellen was dovish, at least, compared to what the market expected and based on the market reaction post the conference. We tend to look a little beyond the next few days in our outlook and the way we invest. But even on that, longer term basis, we are quite constructive about emerging markets.

Number one, we think the fundamentals of the global economy are pointing to a very gradual hiking cycle and specially in a historical context. The growth is improving both in emerging markets and developed markets. So, we think that with a gradual cycle, this growth momentum will allow emerging markets to outperform and overweigh the higher interest rates headwind.

Latha: You sound positive on global economy this year, but if you looked at the crude and metal commodity prices, we saw them rallying, but that rally came to a kind of a resistance over the past 3-4 weeks. Should we therefore have questions that the global growth is not as robust as originally expected?

Gingold: I would have said yes up until Tuesday, but in that context, the more important news for emerging markets, even more so than the dovish Fed is the very strong economic data that came out of China on Tuesday and that made me much more comfortable at least for the near and medium-term outlook for the market and for emerging market equities.

I think the market in general, expected a gradual slowdown in China. But the reflation that started back in 2016 seems to be still going and in fact, the economy seems to be accelerating in the early months of 2017. So, that is definitely very positive. Surprisingly, the housing market in China is doing very well and that will keep the economy growth momentum growing and help the emerging markets.

Sonia: I am most interested to hear your view on the Indian markets because when we spoke last which was at the time of the Budget, you had indicated that you would be pleased if the government sticks to its fiscal consolidation roadmap and stays away from populist measures. Has the government met your expectations and with the recent win in Uttar Pradesh, do you think that the case for putting more money into the Indian markets become stronger?

Gingold: India is definitely one of our favoured, if not the most favoured markets in the global emerging markets context. In terms of the Budget, I would say that the government definitely met my expectations, but I would note that I am also glad to see that they slowed somewhat the pace of fiscal consolidation. I think that will be one trigger going forward at least in the near to medium-term that would help the economy especially the rural consumption.

Anuj: We have already seen a 15 percent rally in Indian market this year. Even the MSCI emerging market index is up 9 percent. Do you think in the near term we could be looking at a scenario where things get overheated and that leads to a bit of a correction?

Gingold: We don’t really try to forecast the market in the near term. Our investment horizon tends to be beyond two years. Technically there could be some correction. I could probably list a few reasons why the market could correct – one would be technically it looks very overheated and the euphoria is definitely very high. However if I look at one year or two year perspective in India, this is a market where we find companies and that is not the entire market of course but we are very selective in our stock picking. Where we find companies that deliver and give us 20 percent plus earnings growth, that is very unique and yes you are paying a bit higher price for these companies but in today’s world where growth is lacking everywhere, finding companies which can consistently deliver such earnings growth, while creating shareholder value, I think that is a price to be paid and we are happy with our exposure in India.

Latha: In that case, what are those islands of 20 percent plus, if you can speak stocks or sectors?

Gingold: I certainly cannot speak about stocks unfortunately, but we have investments in consumer facing sectors. We tend to focus on sectors that are driven by domestic factors and the domestic economy because to Geoffrey's point, while short to medium-term, the outlook looks good for global growth, we are not overly bullish in terms of the structural growth and a V-shaped recovery. So, we definitely tried to stick to markets and companies that are more exposed to secular growth stories and domestically driven growth stories.

So within India, we have consumer companies that benefit from premiumisation, for example, that is a big theme that is happening not only in India but in other emerging markets as well whereas the consumer being more educated, going for products that give them a premium. That space is a very interesting, secular story for us.