The global financial crisis has shaved off trillions of dollars of investor wealth in less than a year and pushed some countries into recession and others towards a significant slowdown in economic growth, including India. Vishal Chhabria and Jitendra Kumar Gupta spoke to Punita Kumar-Sinha, senior managing director of The Blackstone Group, on the global crisis, its impact on India, the market and economic outlook and investment strategies. Based in Boston, USA, Punita is the portfolio manager and chief investment officer for the India Fund and The Asia Tigers Fund, two closed-ended mutual funds which are under her supervision since July 1997 and June 1999, respectively. They had combined assets under management of $1.37 billion as on September 30, 2008. Excerpts:
The central banks of many countries have pumped in trillions of dollars into the system, but the markets have not taken it in a positive manner. What is your assessment of the global financial crises and how much pain is left?
Right now we are just focusing on the financial systems and I believe the impact on the real economy is yet to be fully felt. The economic growth numbers across the world may still come down. The pain is still to be felt at many levels but a large part of it has already been felt in the stock markets. Countries where there is good economic stimulus being provided by governments may find a bottom sooner than the others.
Typically, the stock markets lead the economic downturn in both recessions as well as recoveries. Right now, I believe, based on the fact that the stock markets have been weak, it might take another year before the impact is fully felt in the real economy.
What is your view on the global economy particularly the US and Europe and its impact on the rest of the world including India?
I believe the economies that are very export dependent will have to shift their economic models to more domestic consumption or shift their exports to countries other than just relying on the US. In that sense, some of the emerging markets will be quite impacted particularly China's manufacturing sector. I believe countries that are less dependent on exports would obviously stay better in this environment.
But in those countries too, particularly such as India, the governments will have to focus on getting the domestic economies to do better. We have to see that the interest rates and the inflation rates come down: we have seen some sign today but in my opinion, obviously not enough. As the commodity prices such as oil and everything else comes down, something we are seeing already, I believe inflation will come down. Central banks can take further measures to increase the domestic demand in India. Also more importantly, they will have to focus on increasing the savings rate and making India less dependent on foreign inflows.
India is also seeing the economic slowdown. If India is able to mange capital or obtain capital which is a big concern, then I think it can manage its growth.
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Where is India in the capex cycle? We are hearing that the capex plan of corporate India will take a hit either due to lack of funds or due to high cost of debt. Your views
I believe we have now begun to see a slowdown in India’s capex cycle, particularly in the manufacturing sector. Project funding has been impacted from a slowdown in equity investments and debt disbursements. On equity flows, FII volumes have declined, making it more difficult to raise capital from the equity markets. FDI’s have also slowed.
On debt disbursements, the cost of funding is becoming a hindrance in achieving attractive IRRs on investment projects. Banks have become more cautious in lending to SMEs and select retail clients (generally, personal loans and credit cards). RBI has reduced the debt cost substantially in recent weeks and I believe we will begin to see some of the impact in the future. RBI's proactive stance in improving the liquidity and lowering the rates will make debt financing attractive for capital expenditures, going forward.
What is your view on the earnings growth for the Sensex in the FY09 and FY10?
We don't share our estimates, but the consensus number is still pointing towards about 15 per cent growth for the FY09, which I suppose could come down little bit further. For the FY10 numbers, I do not think given the current environment we can rely upon any forecasts.
What is your view on Indian equity markets?
I do believe the worst is over on Indian equities. And there is some good news, which should not be ignored. We have seen inflation peaking out and we do think the sharp fall in the commodity prices globally is a good sign for the inflation in India as well. Interest rates, which were fairly high and have actually caused a lot of slowdown in India, are easing as a result of cuts in CRR and interest rates. I do believe the trend is in the right direction now.
As interest rates come down in India, it will hopefully stimulate the domestic economy to some extent. Except foreign portfolio inflows, which I believe is still probably going to remain on the sidelines for a while, the three big factors, high oil prices, high interest rates and high inflation, are moving in the right direction (declining). That is why, in my opinion, it is important that India's own liquidity and own savings be more efficiently channeled into the equity markets.
Will you advocate a more defensive strategy? How will you go about the Indian equity markets now?
People have already moved into the defensive sectors and that is why the valuations of some of these companies are at significant premium. Today, I think we are in a very fluid situation with lots of data policy announcements coming in everyday, one cannot take a buy and hold approach. One needs to manage portfolios much more actively.
In my opinion, investing now needs to be very stock specific and a lot more due diligence will have to be done on the companies. More research needs to be done on which companies are going to have funding problems, working capital and debt issues along with the growth prospects of each of these companies. If companies are insulated from some of the global factors, that would be favourable for them in the current environment.
We will look for the companies which have strong earnings visibility and ability to arrange funds for their ongoing capital expenditure plans. In this environment one sector which is well positioned, is anything related to the power. If these companies can arrange the funds, then these companies may benefit because there is definitely significant demand for power capacities to be built in all the different parts of the country.
FIIs are still facing problems on the redemption front. Will that continue and lead to further selling in the Indian equity markets?
The redemption pressure is there, I do not have numbers, but yes there could be more redemption. But the good news is that, in my opinion, the markets are fairly attractively valued so there should also be some long term buyers.
