India's macro trend strongest among EMs; will buy on dips: Citi

On the expected market impact if the Reserve Bank Governor Rajan indeed exits, Khanna says there could be short-term volatility but that will be used to invest.Below is the transcript of Abhinav Khanna and Richard Heyes’ interview with Sonia Shenoy on CNBC-TV18.Q: You were just telling me how you have 30 years of experience in the equities market. You guys at Citi have been constructive on the Indian markets and we are now sitting at about seven month highs on the Sensex. What is the sense you are getting? Did the investors and the people who attended your conference, did they share the same kind of enthusiasm which you have?Heyes: I would say definitely yes. And I would say more than that. The story in terms of the macro environment, the demographics, the lack of deflation here, people continue to be excited about what could potentially come in the future.Q: So, what could potentially come in the future in terms of an upside? I remember when the Sensex hit 30,000 in our studios, we wore T-shirts, it said 30,000 and post that, the Sensex started to move lower. Do you think that there is a chance of us getting back to those all-time highs?Heyes: I will definitely pass it to Abhinav in terms of specific index levels, but I would say that the world increasingly is looking to India as one of the key engines of growth. We are seeing at best low levels of growth in the US, Europe, Japan suffering. China has done well, but it has been very much stimulus led. So, the world looking to India now as a very significant opportunity for future growth. Q: What was the corporate mood like at the conference?Khanna: For the first time in a long time, we had both the corporates as well as the investors sounding quite optimistic. We saw the results season for the fourth quarter just end a week back and for the first time in several quarters, the company has actually delivered a positive surprise against expectations. And we feel that this actually is an inflection point. For the first time, we saw a double digit earnings growth if you were to strip out the financials in several quarters. And we feel that over the next few quarters, as the economy continues to recover and as the NPL problems of the banks settle down, we will see the earnings numbers for the market overall to start picking up. And we feel that the return on equity (ROE) numbers for India in the context of global markets and in the context of emerging markets are still very attractive. And that will enable the market to sustain the valuations if not potentially rerate a bit further as well. So, our target for the Sensex is 28,800. It is not very far from what we just mentioned.Q: What kind of money do you think is coming into the Indian market? Is it tactical horse money that can easily move out or do you think that long only funds are genuinely interested in India now?Heyes: India has been a consensus overweight for many of our clients for a fairly extended period of time. So, a lot of people are already here in the market. So, if more money comes in, it will be long-term, they are buying the story, they are buying the fundamentals, this is not just about tactical trading.Q: They will not be deterred if Governor Rajan does not get his term extended because that is the hot topic today. Everyone is asking each other that question. Heyes: We were talking about it at lunch. Short-term it would probably be a small negative for the markets but life would undoubtedly go on. So, I think we would pass through that and actually interestingly, a number of clients have said to me it would be a very interesting buying opportunity.Q: And what about you? What is the sense you are getting?Khanna: As Richard mentioned just now, the sense of continuity, even if Dr Rajan does not stay for a second term, whoever comes after him, the expectation is that he or she will continue the path which Dr Rajan has taken. While there might be some near-term volatility, but as Richard mentioned, we were at lunch with a client and he actually mentioned that if such an event would occur where the markets come off, then he would use that as a buying opportunity. So, most of our foreign investors would treat that as a buying opportunity and just to maybe add one point regarding your question on flows, in the last 18 months or so, we have seen more inflows into India from the domestic institutions and not as much from the foreign institutions. I think the tide could turn. It is possible that in the second half of the year, we could see foreign money potentially exceeding the domestic inflows.Q: At the conference I noticed there was a large representation from financials. What is your own view on financials because not only private banks, now PSU banks like SBI are also starting to perform. Do you think one should put incremental money there?Khanna: On financials, our stance is overweight. It is actually amongst our most overweight stance within the whole India strategy view. We feel that while it is tough to call a bottom in terms of asset quality cycles, we feel that we are somewhere there and irrespective of whether you talk about private banks or public banks, the clean up in the system has happened pretty much across the board. The public banks have borne the brunt, but the valuations have also come off significantly. So there are a couple of public banks that we like as well, but in terms of preference, we would still prefer the private banks over the governed banks. And then interestingly, quite a few non-bank financial companies as well where we feel that they could see good growth in the coming quarter as well. So, overall view in financials across banks and NBFCs is quite positive for us.Q: You have seen many such cycles over the years. What is the sense you are getting about India? Do you think that we are in a long-term structural bull market and if we do see some correction in other emerging markets, because of global volatility, do you think India will also correct or could it decouple?Heyes: If we see a significant correction, I do not think any market will be spared. But again back to what we talked about earlier, the macro trends here are probably as strong as anywhere really in the world in terms of the emerging markets. So, I still think we would be very positive on the opportunity in India. Q: And you were telling us about the feedback that you got from a lot of the investors on Governor Rajan. What else is top of mind in investors and what are they talking about with respect to India and different sectors?Heyes: A lot of the focus of this is still what is going on in the macro environment, what is going on in the US economy and you cannot get away from China. China is so big, so important, it has been the engine of growth for such a long period of time. They are really here to understand what a lot of the corporates are doing but they are also very considerate of what is going on in the macro environment.Q: So, there is still fear of things heating up in the Chinese markets?Heyes: Almost the opposite o slowing down, but yes, definitely concerns about what would happens in China that remains still. A lot of question marks around the economy.Q: Are people worried about the Brexit, the referendum there?Heyes: Brexit is fascinating in terms of if you look at the volatility of sterling, it is at unprecedentedly high levels. It hit 22 today and normally it would be single digits. So, there is undoubtedly a level of concern. The trouble is it is so close to call, people are not prepared to go one way or the other. So, in markets in general, it feels or looks like there is a level of complacence. I am not totally convinced that that is the case and people are thinking about it but they are just not prepared to go one way or the other in this month.Q: Complacency perhaps because global headwind has been used as a buying opportunity up until now and it has proved to be a good buying opportunity. But what is your preferred market now if you had to rate markets 1, 2, 3? What would your pecking order be?Heyes: I still think we would have India very much at the top or near the top. And then the other markets that we still like in terms of both the macro, some of the fundamentals and also just given the underperformance we saw last year will be the EM markets. Philippines will probably be the best example.Q: You were telling us about your corporate clients and the feedback you got. The sense we get from the corporates we speak to is that the worst is the perhaps, still not over. There are green shoots, but very minor green shoots currently. What is the sense that you are getting?Khanna: That is the right sense and on the subject of green shoots, in our economy’s piece, we track a certain set of leading indicators and chief economist for India highlighted in one of our reports earlier this year that effective February onwards, his heat map actually turns net green. So there were a majority of indicators which actually showed that we have turned the corner and from here on, the economy should be on an uptick. It is a slow uptick no doubt, as you just said, but if we are patient, I am sure we will see opportunities over the next few months. The earnings might still take longer to recover while we have had good quarter versus expectations, but there are quite a few sectors in the economy which are still facing stress. So earnings might take longer, but the markets will probably discount that recovery before you actually see it in the numbers. And just one other point on the corporates, we discussed the macro and Richard mentioned some global thoughts there, but it is actually very interesting to see that irrespective of where the market is, at what level the market is, most fundamental investors are still doing a very in depth bottom up analysis. We probably had a record number of one on one meeting in this conference where investors met corporates one on one and they are very focused on a bottom up analysis irrespective of US elections, irrespective of the British referendum or whatever else is happening.Q: So, people are still hungry for ideas.Khanna: Absolutely.