The Indian market has outperformed its emerging market peers in the first half of 2010 and has done particularly well compared with Brazil, Russia and China. Part of the reason for this, says Rashesh Shah, CEO and MD, Edelweiss Capital,could be the slowdown in China. Shah, who?s just back from the US, tells Shobhana Subramanian he is confident of the India story over the next decade though he cautions that it won?t be a one-way ride.
The Indian market has been fairly resilient; any thoughts on where it could head?
Despite a cloudy outlook globally and the first quarter results not having been encouraging, the market has been amazingly resilient. The general belief among investors seems to be that there will be huge inflation or total recession. Since there isn?t visibility, they feel that in either case it is safer to be invested in equities, than in other asset classes. So equities are becoming some kind of a safe haven probably because investors believe that although there are problems, corporations are growing and will continue to grow. And with chances of currencies getting devalued, they believe equities are a better bet. And it?s not that they?re only coming to the emerging markets, there is buying equities in the US too. I?m just back from the US and what people are saying is that companies should be able to do well.
India is now a very expensive market and trades at a huge premium to other emerging markets but money nevertheless seems to be coming in…
Part of the reason for this is the slowdown in China and people are now looking at the growth rate of the growth rate or the second derivative . India?s growth is accelerating and so our markets have gained. Also, there is a lot of allocation money coming to India; investors want to play India even if it?s expensive. If there is a correction to say 4,800, money will pour in. On this trip to US, the common theme was that India is very expensive so while investments are coming in, it?s not coming in really large amounts. We?re not seeing the kind of money we saw in 2007 and, I think, this year FDI flows, which are already at about $25 billion, will overtake FII flows. From now on I think FII flows of $14-15 billion in a year are going to be steady state, anything above $20 billion is a lot of money.
Will the supply of paper in the next six months hurt the secondary market?
Let?s take a look at cash flows. LIC is going to earn some Rs 200,000 crore this year through fresh premium and investment income and they believe about Rs 75,000-Rs 100,000 will come into the markets.
How much can they investment in bonds? The other private sector insurance companies will probably invest about Rs 25,000 crore and FIIs will bring in another Rs 75,000 crore. I?m not taking into account HNI, retail and household money but Rs 1,50,000 crore of flows will come into the market.
The government?s disinvestment target is Rs 40,000 crore while all the other IPOs put together could be a similar amount, I don?t see equity issuance of more than Rs 100,000 crore, and so it should get absorbed.
Is there any risk to the India growth story right now?
Inflation. Inflation is a very big worry, and it?s astonishing that inflation is not coming down. A part of it will be taken care of by the arithmetic but if it doesn?t fall below 8%, the government and RBI might then have to slam the brakes, even if it means slowing down growth. We?re already seeing some political impact. If inflation stays above 8% for another six months, that?s a real risk. Already rupee forwards are expensive at 4-5%. So if inflation stays at 6.5-7%, it?s is fine but otherwise capital will become expensive and scarce, which cannot be a good thing.
So how do see the Indian market over the longer term?
The India story is a powerful one for the coming eight to ten years, though it won?t be a straight line. But I must say that we haven?t seen a correction and an 8-10% correction can come anytime. But all these dips would be an opportunity.
What?s your call on real estate?
I think analysts are still trying to figure out how to value real estate stocks, especially land. But they should get a grip on that in about a couple of years. In Mumbai, there is clearly a glut in the commercial space, in Nariman Point for instance, there is enough space and the ?C? quality buildings aren?t finding takers. In the residential space, there isn?t enough supply right now but if all the projects that are planned come on stream, then there could be oversupply. In the last couple of years, many of the commercial projects have been converted into residential projects. But then, in the residential space, there is always demand at a price. The key difference between commercial and residential markets is that the commercial market is not price elastic because companies need space only when they?re growing and will not lease space simply because it has become less costly to do so. But if home prices drop, people always want to buy.So the residential glut will cleared if prices are affordable, which I think will happen. Prices today are high so offtake has clearly slowed down.
What?s your view on gold?
That?s a funny one. Our view is that it?s something people will always buy when the price fall, it is the final hedge. Especially in India because here gold is both a currency and a consumer item. Gold is a refuge and is correlated to inflationary expectations and globally since there is concern on currencies, globally it may be a good investment. In India though there are other investment opportunities, so just about 8-10% of the portfolio can be allocated to gold, because it doesn?t give you a yield whereas real estate gives you a yield.
Is the buy and hold strategy going out of style?
Perhaps stocks need to be reviewed more often these days, so you can?t buy and hold for ever because the environment today is far more dynamic. Take a Bharti; investors would have lost had they held on. But you can?t also buy and sell too often, because then only the broker will make money.
Which are the sectors that you like in the Indian market?
We like commercial banks, especially PSU banks because they are relatively undervalued. Even if interest rates go up, the profit pool is growing, household savings are growing. We also like capital good companies because the investment cycle is turning. And we like construction companies.
What do you look for in a stock?
Apart from management quality and the business model, we look for growth in the industry. Because if the industry is not doing well, even a great management can?t do anything. The industry structure is important; we check for entry barriers and whether the profit pool is increasing.