Indian market to see 10-15% upside by 2015-end: UBS

Below is the transcript of Geoffrey Dennis' interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: It is widely expected that the Fed will sound dovish that June perhaps is out of the way. Do you think that there can be something in the statement that might leave the market a little bearish? What are you personally expecting? 

A: I would be surprised. We expect the Fed to essentially repeat the message that they gave in the last meeting, in other words, pushing off into the future the chance of interest rate hike. Given the way that the macro data has been coming out of the US over the last six weeks, last Fed meeting, it would be a surprise if they turn more hawkish. So, we expect a pretty benign statement from the Fed tomorrow.

Sonia: Having said that how would you approach the emerging markets for the rest of the year because market like India have seen a flat performance this year at best while other markets like Hong Kong, etc have gained about 15-16 percent. What is your own prognosis? 

A: We certainly think having seen this tremendous run in emerging markets since the last Fed meeting six weeks ago, there is always going to be vulnerability to bad news and although we don't expect that negative news to come from the Fed tomorrow, obviously there is a growing possibility or there is a chance that as you go through the year the Fed may start to think about raising rates in September. So, we have to keep an eye out as to what could happen in terms of a US monetary policy down the road. However, the markets are vulnerable in EM to some strong data at some point over the next several weeks. Also, we have had a very good run and valuations are getting a little stretched in the emerging markets and so we are waiting for earnings growth to come through also which would be beneficial. At the same time you had such a huge move in China obviously particularly in the local market, the A-share market that there is a vulnerability that you might get some sort of sell-off there.So, I think there are risks out there but we think these liquidity conditions that are in place now will remain in place for at least another couple of months or so. Therefore markets will continue to do well. So, we still and the investor should still be fairly fully invested as far as emerging markets are concerned.

Latha: What about the kind of foreign investors selling that we have been seeing in India in this month itself, about USD 1.5 billion has flowed out. It is not a great deal of money in the general scheme of things but it has been consistent selling day after day practically everyday of April. Does anything happen to reverse that trend or does it even plateau out?

A: I think it will settle down relatively soon. I think India is still a good story and it had some significant profit taking as you say some significant outflows. I think what has been happening here is that couple of other markets particularly China but also of course Korea have been attracting some money out of India. Most international investors are a bit overweight India; global emerging market investors have got big net overweight on India. So there was always a possibility that there will be a pause and once you get some selling attempt to cascade a bit and so everybody wants to take some money off the table. Obviously there has been some disappointment in India over the earning story in the last quarter, some concern about the economy and will it pick up quickly with the reforms going through and of course the recent decision on retrospective taxation of capital gains. So this all represented challenges, good reasons to take some money off the table but we think the India story is still very good and we would be advising people to start to look to get back into the market.

Sonia: Since you would advice Indian investors to start putting money into the market, what would your assessment be of what the returns could be by the end of this year? It’s been flat so far but markets like China have already given 35 percent returns this year. In the India versus China story what could the returns looks like?

A: I do not think you are ever going to get 35 percent return in India this year because the market was too expensive; it had too much of a good run for that to occur. If you take a look at the Hong Kong, China enterprise index market which reflects what global investors; investors in China, it’s a best representative of Morgan Stanley Capital International (MSCI) China – that was very cheap but it underperformed for a long time, so you are always going to get big moves there and the local market in China has got some specific drivers which push the valuations, so you are never going to get those sorts of returns. However, I would be looking to add India now and between now and year end we suspect that 10 maybe even 15 percent upside in the local market because the story in India is still very strong with good earnings growth, with good RoEs, with the reforms coming through, with lower interest rates etc. It’s a good market. We are starting to look at India in the very near term once again.