As head of the investment office at Deutsche Bank?s Asia-Pacific private wealth management business, Tuan Huynh is responsible for the in-house market view on the entire region. South Korea, Indonesia and India are his preferred Asian markets today. His advice to clients is simple: start allocating money in the Indian debt market whenever the 10-year bond yields touch about 8.2%. On a short visit to India, he spoke at length to Ashley Coutinho and Muthukumar K about the future trajectory of the Asian markets.
There has been a surge in foreign investments in the Indian debt market? Any thoughts?
Developed markets give limited choice to foreign investors. If you look at the US or Europe, cash rates before inflation are as low as 0-1%p.a, which is not attractive at all. (Cash rates are interest rates you earn on short-term money.) Inflation in the developed world is starting to rise in a controlled manner and is expected to be at about 2% in the US and Europe.
We also expect bond market yields in developed markets to rise. We have already seen that in the US and some European debt markets. We expect economic growth in the US to be at 3.5-4% this year. This is a reason why yields are also starting to pick up (inflation is another factor). We forecast the US 10-year treasury yields to rise to 4.5% from the current levels of 4%. That is also negative for the bond market since the existing bond portfolio of bond investors takes a correction. There is more or less no return on the liquid side and one might suffer losses from higher yields in paper on the bond side as well. So you start looking at other markets like India and Indonesia. That?s why foreign investors are putting in their monies in the debt market of the emerging markets.
So what is the kind of returns that foreign investors can expect from emerging markets like India?
You have to combine these returns (mentioned above) with those on the currency front. Our forecast is that in 2010 we will see a further appreciation of INR versus the US dollar. Over the last 12 months, there has been a significant appreciation, with the INR coming from the 50 levels to about 45 levels. Our forecast is that by the end of the year it will reach 43/43.5 levels. So, if one considers a rupee appreciation of 2-3%, the combined returns for foreign investors from India could be around 10-11% p.a. If you are a US dollar bond investor you don?t get any gains on the currency front and the combined return might be about 2-3% p.a.
What is your forecast for India?s growth?
India is set to grow at 7.5-8% for fiscal 2011 compared to US?s 3.5-4%. Among the several advantages India has are its rising middle class and young population. The biggest risk is on the inflation front. We feel inflation will peak at 10% and come down to 6% by the end of the year. We do not see any oil price spike this calendar year and expect it to trade between $80 and $90 per barrel.
The RBI has raised the repo, reverse repo and the cash reserve ratio by 25 basis points each. What is your take on this?
It?s in line with our expectation. The central bank noted that historically low policy rates (real policy rates are in the negative territory) and surplus liquidity can complicate the inflation outlook and impair inflation expectations, but it also stressed the need to normalise rates in a ?calibrated? manner, given that growth recovery is still nascent and public sector borrowing needs are large. We expect the RBI to hike policy rates (repo and reverse repo) by a cumulative 100 basis points and the CRR by another 50 bps through the course of FY11.
Is this the right time to invest in the Indian debt market?
Last year we were underweight in the debt asset class. Our forecast for the 10-year bond yields in India is that it should rise to 8-8.5%. For the last six to nine months we were telling our clients to switch out of the longer term bonds as we expected yields to rise in India. Right now, we are still a little cautious on the debt market because of the government?s borrowing programme and inflation. But we are not as bearish as before. Our forecast is 8.5% and we are nearly there. We are telling our clients that they can start allocating money in the debt space whenever the yields touch about 8.2%.
How about the Indian equity market… The Indian equity market has been one of the best performing markets this year, but is among the most expensive in its peer group.
We are still overweight on Indian equities. A year ago, no one could have predicted the Sensex to touch the 17,000 levels. A key driver for the market was the outcome of the elections. With a solid government eager to bring in reforms in place, foreign investors started pouring in money. Globally, economic recovery started in the second half of 2009 which had a positive impact on the Indian economy. And now, of course, corporate earnings have started to pick up. That is why we feel that 2010 will be a good equity year but we will definitely not see returns of 40-50% seen last year. In the beginning of this year we had predicted a return of 10-15% on the Indian equities. If we look at the first quarter the Sensex was flat, so there is still room for a double-digit return this year. India has been trading at a premium for the last ten years. But the higher valuations can be justified because of superior earnings growth in India compared to other Asian companies.
Which are the sectors in India that you would like to bet on?
In India, we like the infrastructure sector and believe that the execution this time round will be better than in the past. Infrastructure is a mid- to long-term story, and we tell our clients to keep a time-frame of at least 2-3 years in mind while investing.
IT is another sector which we have been positive about in the last six months. That?s mainly because of the recovery in the global economy and more particularly the financial services space, which outsources a lot of its work to the sector.
The metal sector is our next preference due to a recovery in the commodity prices. Soft commodity is our preferred asset class, chiefly because of the strong demand from China, which forms around 30-50% of the demand for most of the commodities. Commodity prices will remain high if China continues to clock 8-10% growth.