GDP Could Double In Next Five Years

Updated: Aug 31 2003, 05:30am hrs
Leading brokerage, investment banking and mutual fund house DSP Merrill Lynch expects the bellwether Sensex to touch the magical figure of 5,000 points in the next 12 months. The fund house sees a strong growth in the domestic economy which, in turn, should lead to strong inflows in the form of foreign direct investment (FDI) and foreign institutional investor (FII) investments. DSP Merrill Lynch chief administrative officer & executive vice-president (research) Andrew Holland explained to Sudhir Shetty of The Financial Express as to why India and China are the favourite markets for FIIs. He also throws light on the relative strength of the Indian markets. Excerpts:

At DSPML what is the strategy for a stock pick. Value, growth or fundamentals
We use all the three, but our starting point is obviously the fundamentals of the company:

i) The industry from both domestic and global stand points; and

ii) The companys position within the industry.

Thereafter, depending on the outlook for the sector, we look at the companys growth potential within their sector. Assuming both the sector and the company are growing, then we look at value (P/E etc) compared to both domestic and global/regional companies.

The market has rallied over 1,100 points since April this year, do you think there is still enough steam left in the rally
We still believe there is good value in the Indian market over the long term, so while we may see some short-term corrections, our view remains that the index will be north of 5,000 this time next year.

Where does India stand among the emerging markets
With respect to India, compared with other emerging markets, a recent Merrill Lynch Global Fund Managers survey showed India as one of the main areas for investments by fund managers. In Asia, India along with China has been a favourite market for fund managers based on the strong fundamentals over the past six months.

The slowdown in the economy of the developed nations has led to higher inflows in the emerging markets, but do you expect this to continue if the economy of developed countries, especially that of the US, starts picking up
While Merrill Lynch expects a recovery in the US and Europe, it is likely to be gradual. As a result, growth in the economies of say, India and China in terms of GDP growth, will continue to stand out.

Consequently, while there has been a pick-up in the equity money inflows towards developed markets, money inflows to international mutual funds, and in particular Asia, remain strong.

There are talks that the current rally is mainly fuelled by strong inflows from hedge funds. Is this a worrisome factor on a long-term basis The scepticism is that these players remain in the market on a temporary basis and exit the market as they make a profit How do you differentiate between hedge fund and normal FIIs
I believe the scepticism towards hedge funds is misplaced. Indeed most are long-term investors, but as is the case with domestic funds even the hedge funds are expected to book profits if the share price of a company has moved beyond the fundamentals on a short-term basis.

As there are new FIIs behind the current rally, there is an assumption that this a strong signal that Indian markets are looking very attractive. Is the appreciating rupee to the dollar one of the reasons for strong FII inflows
While the appreciating rupee has been a positive factor for FII investors, we believe the main reason for the strong inflows are:

a) GDP is expected to grow at 6.4 per cent this year and 6.3 per cent in 2005.

b) The market P/E of around 10 times remains good value given earnings growth of 15-20 per cent.

c) India is undergoing rapid changes in terms of demographics and consumption spending. Indeed, we expect household consumption spend to double from an estimated $250 billion to $510 billion over the next five years.

d) FDI and local industry investment in manufacturing will help propel GDP growth further. If this proves to be the case and there is a material uptake in the investment cycle, then the GDP could double in the next five years.

Overall, we believe the domestic economy will grow very strongly and therefore, expect to see strong FDI & FII inflows over the next year or so.

Which are the sectors you would like to bet on
Given our positive views for the domestic economy, we believe most sectors will be major beneficiaries. However, considering the recent stock market rally in the majority of sectors, we feel the next sectors to rally will be - cement, petrochemicals & consumers.

What is the story behind this current rally Is the focus on dividend yield value picks in mid-cap stocks or is it a broad-based rally How can you differentiate India with other emerging markets
I believe initially, investors took advantage of the high dividend yields that Indian companies offered, compared to the other markets.

Since then however, the rally has been more broad-based as investors bought into domestic economy plays. Mid-cap stocks have also seen renewed interest after a considerable period of time.

It should be noted that small and mid-cap companies have been outperforming their larger counterparts in the US & UK also.

This is due to the fact that small/mid-cap companies are usually seen as a good play on the recovery in the domestic economy - and hence India has been no exception here.