Short S&P 500 and go long BSE 500, says Jim Walker

Ekta: In your investor presentation this morning, you did mention that you would go long on the BSE 500 and possibly short the S&P 500. What makes you so bullish on India going into 2014 and do you expect a formidable recovery in the macros?

A: I think the macros will take a bit of time. But the reason that we are very confident about India, looking not just at 2014 but the next five years, is because of what we are seeing happening in Indian companies over the course of the last year or so. They have realised that they were overleveraged. That their balance sheets were bloated. That is why the economy has slowed down because they had cut capital expenditure. They had begun to repair their balance sheets. And of course that then sets the springboard for the economy to recover again and for corporate earnings to pick up.

Anuj: What about India versus China? For the last two days, we have heard some experts say that some money might shift from China to India in the morning. But some experts say it is already too late for that, China is already in a bear market and may come out of that. Over the next three-five years, if you have to bet your money in one of these two markets, which would that market be?A: There is no doubt that it would be India in my mind because India has gone through over the course of the last two-three years, a very significant slowdown in the economy, again on the back of capital expenditure cuts at the corporate levels. China has still to do that. By the way, I wouldn’t be so confident as to say that China is in a bear market. Certainly, the Chinese indices and the headline level have looked pretty weak and look as if they are in a bear market. But there are many companies in China, outside the biggest ones, which are between 20 and 30 times earnings. There are lots of very expensive companies in China that people have been hiding in. But if we are right on China, and the economy has very serious problem to go over, we will have tremendous downside risk. So, if I were an investor that had money in China and India at the moment, I would certainly be switching from China to India.Ekta: You are speaking about being bullish on India on a 3-5 year basis. Where do elections come in as a possible parameter or something that you would be looking out for or a variable? The next three-five years is possibly going to be determined by what takes place in the elections in April and May. Would that be a big risk to your thesis?A: It is potentially a risk of course and if we were to end up having more of the same as we have had over the last five years. Then we will probably need to reassess. But certainly in my view, the elections are a secondary factor in being positive about the India story. The primary factor is the companies in India and their behaviour over the course of the last 18 months. When you see companies realising that they have a problem, that they have overextended themselves, they have over-borrowed and willing to cut back, reduce their capital expenditure, improve their cash flow position, improve their balance sheet, this is normal corporate behaviour at the bottom of the cycle. It then gives the investor a very good chance to get a reasonable level on those companies. We have seen that in India. So I am very confident, regardless of the politics, Indian companies are attractive. Anuj: What is your reaction to the Interim Budget that the Finance Minister presented the day before and in terms of the financial mathematics, in terms of fiscal deficit, this 4.6 percent number a lot of people are saying that maybe the quality of the number could be debatable, what is your opinion on that?A: I suppose the best that can be said for the Interim Budget is that it didn’t do any more damage and that is a plus point. The new government is going to have to re-look at the finances very carefully over the course of the next six months. The quality of the deficit is very worrying that the deficit targets are being met with planned expenditure cuts and other ones, capital expenditure in some of the social spending. They are necessary for India to improve its position over the course of next few years. What we need to see being cut are unplanned expenditures things like subsidies, which need to be phased out of the Indian Budget altogether. The quality is not so good but at least this is only another three months before somebody takes a fresh look at the whole thing and hopefully comes up with an expenditure and revenue programme that is going to be much more beneficial for India over the next five years. Ekta: Would you have a view on the gross domestic product (GDP) that India might clock in for FY15? You did speak about the US economy as well. Where would you be placed in terms of export growth in FY15 for India, do you think that would be one of the key reasons why we could even see some amount of an improvement in the macros?A: We are probably going to see a decent export picture from India but very much more on the back of what has happened with the currency, the rupee, over the course of the last year. It is at 62/USD and Indian exports are probably feeling fairly competitive.

Ekta: You were talking about the FY15 GDP target for India, where do you stand? Do you expect it to recover in FY15?A: I think it would recover slightly in FY15 but not until the second half of the year. So looking at the last quarter of calendar year 2014 and Q1 of 2015, the next two quarters are probably still going to be relatively weak given what has happened with the capital spending plans in companies and in the government. All of them seem to be on hold until after the election. So I think a relatively weak year and probably some disappointing numbers over the next few months which if the markets don’t like them, those are good opportunity to be buying in. Anuj: Last year India’s biggest problem was that twin deficit and the way currency collapsed. Now we have seen some sort of stability on that front. Current account deficit (CAD) quite clearly is a problem of yesterday. Going forward, what do you think is the biggest macro challenge over the next one-two years?A: Undoubtedly, it is addressing the long-term structural fiscal position in India. We can but hope that the new government institutes some radical changes, I would expect, on the taxation front, which talked long and hard about GST, Direct Tax Code. These need to happen to improve India’s revenue position on a much stronger foot I think and then also to address some of the things I mentioned earlier, subsidies and some of the unplanned expenditures, which I am afraid, need to be rolled back. That will then put the union government’s fiscal house in order and being to give more clarity to Indian companies into the economy generally.So that is the biggest challenge. Hopefully, the new government is going to be up to meeting it.  Ekta: The CAD has been reined in quite considerably, maybe USD 45 billion for FY14, going into FY15 if there is any sort of relaxation on the import duties or maybe the gold curbs that have come through, do you think that the CAD will then become a big problem for India again?A: No, this year there won’t be a problem on deficit. We are still in that mood of consolidation. So I expect that non-gold imports, in particular, to be relatively soft and at the same time I would expect exports of services, tourism etc to be picking up and even exports of goods despite of relatively weak global economic outlook. So I think current account is going surprise people this year. We even think it could go into surplus before the end of 2014 and certainly if the CAD isn’t in surplus, when you have taken the very solid NRI inflows in the capital side, India won’t have any problems in financing the current account position this year. So that means stability for the currency and I think a very positive outlook in terms of what could happen in 2016 and 2017 fiscal years when the economy starts taking off again.