Bill Maldonado, CIO, Asia Pacific, and Global CIO, Equities, HSBC Global Asset Management, talks to Tanvi Varma
about why he is positive on Indian equities.Q. What is your view of the Indian market?A. We are very
positive on Indian equities for a number of reasons. The economic backdrop is positive and we are likely to see decent gross domestic product (GDP) growth of 5-6% over the next one to three years.
Interest rates are probably coming down and
inflation is under control . Broadly, even the global economy is becoming positive and we are much less worried about the tail risk of global recession compared to this time last year.
India is at present cheap relative to its own history and the region, which presents interesting opportunities in terms of valuations. Typically, India has traded at a premium to the rest of region. Hence, this is a key driver for investing in India.
Investors must keep two things in mind-valuation and profitability. Fundamental investment theory tells us that the more profitable a market is the higher is its valuation. There is a straight-line fit.
In India, earnings have bottomed out and are being upgraded. Compared to popular belief, earnings in India are very stable and can be forecast with more accuracy than normal.
Further, there's a positive sentiment about the pace of reforms, which in itself will drive the markets.
Q. We have received $25 billion FII money in the last one year. Is this sustainable?A. In India, there is too much
focus on FII investments. However, when you compare this number with the market cap of $700-800 billion, it is not massively significant. What can be more significant is a higher contribution domestically. India has a high savings rate, but most of the investments are in bonds, deposits, real estate and gold. If 20% of these funds enter equities, we will see a bigger multiple of that.
Q. How is India compared to the rest of Asia-Pacific?A. Markets in North Asia, that is, China, Hong Kong, Taiwan and Korea, offer a good tradeoff between profitability and valuation, which is our mantra. These are the cheapest and most profitable in the region.
The next is India, which is cheap after a long time. The Asean markets, that is, the Philippines, Indonesia, Malaysia and Singapore, are relatively expensive. Investors wanting to get away from China flocked to these markets considering the high growth rates and no/little correlation to China.
Although these are great transformed economies, the equities there are expensive relative to their history and the rest of the region. Money from these economies is flowing out and being invested in North Asia and India.
Q. Should Indian investors look at global equity funds?A. Investors should diversify. If one has limited funds, one should first invest in a broad-based India fund. If one can save more, one should invest globally. Since India is relatively uncorrelated with the rest of the world, it is easy to get diversification.
Q. What is your reading of the economic situation in the US and Europe?A. These markets
have improved significantly. The US economy has cleared the backlog of housing stock and is creating jobs, which is showing in GDP growth. The fiscal cliff and the risk of its impact on growth have been averted. The risks have declined; however, one can see volatility due to the debt ceiling, which they will have to increase.
Although it will grow below trend and potential, we could see sub-2% growth. This is different compared to Europe, where people have realised that there is no silver bullet or magical answer. GDP growth in Europe is going to be close to zero. Investors have been living with zero growth for the last four to five years. Hence, as long as there is no big recession, it should be fine.
After having said that, the companies in America don't look cheap anymore when compared to Asia, Russia or Turkey, which look cheap and profitable. You missed that rally, you should have been there two years ago. You will miss it here if you are not careful.
Q. What are your views on commodities such as gold, silver and oil?A. With the global economy recovering and interest rates low, in most countries, holding gold has a low opportunity cost. Gold is a non-yielding asset. When interest rates are low, people are inclined to hold more gold.
The interest rates are now coming down but the opportunity cost of holding gold will go up and it may not do so well. In India, there is also a wealth effect to worry about, as gold has a big impact on people's wealth. If it doesn't do well and the currency strengthens, as it should with the economy getting back on its feet and funds flowing in from abroad, gold will become more expensive in local currency. Silver follows its own course; its price correlation to gold has a big range.
Further, silver has lot more uses as an industrial metal than gold. Oil will continue to be range-bound in 2013, unless there are geopolitical events.
