Stable govt, GDP growth to help India get FPIs: Barclays' Prez Dainton

India has a demographic advantage and substantial growth and a political system that is relatively calm and consistent, Stephen Dainton, President of Barclays Bank PLC said

India is drawing global attention from investors due to its stable government, robust legal system, and fast-paced economic growth, tells Stephen Dainton, president of Barclays Bank PLC and head of Investment Bank Management, in an in-person interview with Dev Chatterjee and Jaden Mathew Paul at Barclays’ new office in Mumbai. With over 30 years of experience in global markets, including trading, sales, and capital markets, Dainton also talks about how the markets are responding to the geopolitical events globally. Edited excerpts:

 

How do you view the appointment of a new governor at the Reserve Bank of India, and do you anticipate any change at the RBI?

 

Whenever a central bank governor is moved, there is always a change. 

 

The important thing is there is consistency. Coming from the Indian Ministry of Finance, I would assume that there is a consistent protocol around monetary policy which will be critical. If you look at most of the central banks, when they appoint a new governor, they ensure that they have an understanding of the historic deployment of monetary and fiscal policy and are consistent with the governance intention although obviously representing an independent view. I would view this as very much a continuity candidate and consistent with the underlying direction of the central bank.

 

Looking at various asset classes, how has the year gone by and what are the projections and risk assessments you are making for the next year?

 

I would start by saying that this year, we have seen an exceptional number of people vote for new governments around the world. The democratic process has worked effectively. The area of most concern is obviously what happens on the 20th of January as we will have a new incumbent in the White House in the US. There is a lot of focus on two parts: Number one is domestic growth in the US and the direction of monetary policy in the US and the second is the imposition of a series of tariffs depending on which country. It is difficult to anticipate exactly what the President-elect (Donald Trump) will do but there has been a number of very clear messages of around 60 per cent tariffs on certain countries or not. The relationship between the US and China is going to form a significant part of the focus in the first half of next year. There is political dislocation in France and in Germany and the two core growth engines of industrial production in Europe are going through political change. The focus of attention undoubtedly will be on the direction of the US and on the new President-elect.

 

In this backdrop, how are Asia and India’s assets performing?

 

There has been a strong performance from equity indices in Asia. India is up 13 to 15 per cent across the various indices and sub-indices. So the risk assets have performed relatively well. Importantly for India, it is going through a process of perhaps seeing growth trough and inflation peak. That will be relevant for the new governor to understand. India could enter a period of interest rate easing during the course of next year. But the world has to find growth with many geopolitical concerns around us. Actually, it is unusual in the more than 30 years that I have been in the industry where the geopolitical events globally are so elevated. You have geopolitical concerns in the US, in the Middle East, in Europe, in parts of Asia, Asia-Pacific broadly. The markets are navigating those very delicately.

 

Looking from the perspective of a global bank, how do you look at India right now? And what is your view about the various asset classes in India?

 

First, India has substantial growth. You have a correlation of two events here: One is India has a demographic advantage and substantial growth and a political system that is relatively calm and consistent. If you tie the growth opportunity here and the flows of capital that we are seeing into this country in particular, it is indicative of the very significant global interest in India that has probably evolved over the course of the last decade. But perhaps crystallised itself in the course of the last two to three years as people have become more concerned about China and Chinese production. China's relationship with the rest of the world's global economies. Wherever there is inconsistent government policy and a concern about huge trading relationships, it has caused a very significant focus on other material economies. India exhibits GDP in the top five countries in the world. India has between 5-7 per cent of GDP growth and a stable government. That's a correlation of factors that should be extremely constructive, not only for internally generated capital, but also is extremely attractive for external capital. You are seeing that in many of the different industries that have exhibited growth.

   

FinTech is a great example of where China changed its policy and caused an enormous amount of capital movement to a different jurisdiction. India is exhibiting and continues to exhibit a very consistent pattern of growth. It has a stable legal system that is robust which means that for foreign capital in particular, it's a very attractive place to come.

 

Do you think that Indian stocks command a very high price-to-earnings ratio? Do you think that is a challenge while investing from overseas?

 

It’s important to remember that price-to-earnings is a factor of a numerator and a denominator. If the corporates continue to exhibit a level of earnings growth, they will support more elevated multiples. Nasdaq is up 32 per cent this year and the US listed market cap is two and a half times its GDP. That's more elevated than any other country. But they continue to exhibit earnings growth. The multiples of any index or any corporate are always a factor of two things. And the earnings forward and the forward earnings capability is the most crucial. I think central banks have moved back to really focusing on price stability and inflation is hard to get rid of. If you've lived through previous inflationary cycles, it actually is quite hard to squeeze out of an economy.

 

With Trump coming and US markets doing so well, do you think a lot of funds will flow to that country and will it impact India? 

 

In the flow of capital into India, it is competing against all of the other emerging markets. India has already emerged (economy) and is a $3 trillion economy. But I don't think India is necessarily competing against the US for flows of capital. When I think about diversification, if I am an investor, India is a very natural landing spot for both private capital and liquid capital.