The Indian economy is far more insulated than China’s, but the uncertain political scenario in the country will keep the markets volatile, says Punita Kumar Sinha, Senior Managing Director, Blackstone Group. The group has $588.3 million assets under management in its India fund and $41.9 million in the Asia Tigers fund. In an interview with Vandana, Sinha says that Blackstone is bullish on India’s rural economy. Excerpts:
How do you see this equity market pullback? Do you think it is sustainable?
It is difficult to forecast for the short term with any certainty. I think volatility will continue with rallies and corrections, though, I believe that the bottom levels of November are unlikely to be broken. Several leading global indicators are showing signs of some recovery after bottoming out. This, together with rising investor confidence in government policies, should hopefully ensure that the markets do not go below the November ‘08 levels.
What is your view on the US toxic asset purchase plan?
The US toxic asset purchase plan (otherwise known as the Public-Private Investment Program) to finance purchases up to $1 trillion in toxic assets from banks is a positive development for banks and capital markets. It is well-known that in prior banking debacles, the purchase of “bad debt” from banks relieved the stress on the bank balance sheets and enabled them to lend without fear of future losses.
There are three key issues that will determine the ripple effect on global markets: attractiveness of the programme, speed of asset purchases, and the pricing of bad assets. Attractiveness of the programme will determine the total dollars chasing the bad assets. The speed will be determined by government’s ability to sell off bad assets in a timely manner and without bureaucracy. Lastly, the pricing will determine whether banks will be able to write up asset values and whether private investors will be willing to buy these assets at the prices demanded by the banks.
Nifty is now going for a free-float index. Do you think it could put incremental pressure on some heavyweights?
Yes, we do believe there will be some rotation out of current heavyweights, which are seeing a decrease in their weighting in the new free-float index. Several heavyweights are seeing their weights go down by over 3 per cent. So, these are the ones most vulnerable to selling by funds that benchmark themselves to the Nifty.
What is your view on India, given that there have been rating downgrades and a huge government borrowing?
The main reason for the downgrade was the rise in the fiscal deficit after the vote-on-account budget. This has impacted the currency negatively. Foreign debt sources will decline and become more costly for Indian companies. India’s growth is still dependent on foreign funding and that will remain under pressure with this downgrade.
The country’s key advantage in the current environment is that its economy is far more insulated than China’s, with net exports only contributing 15 per cent to the GDP compared to China’s 35 per cent.
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We prefer India and China among Asian markets due to their strong domestic demand. Valuations in India are in line with other Asian markets though earnings per share (EPS) growth is likely to be higher over the next 12 months in India as compared to other countries.
India also trades at a slight premium to other emerging markets. Corporate profit growth in India is decelerating, though less than in other countries. Unfortunately we have an uncertain political situation ahead of us and until that gets resolved, markets will remain volatile.
Which are the sectors that will determine growth in 2009?
We believe the sectors that are least dependent on the global economy are likely to do much better than the others. The Indian industrial production growth is at a 16-year-low and corporate capex has been scaled back dramatically due the weakening external situation.
This will have some impact on domestic demand as well. However, 60 per cent of India’s population still lives in rural regions and we like companies that are geared to the rural economy.
We continue to like the fast-moving consumer goods sector. However, if monsoons are not good, that sector too could get impacted negatively. We also like select companies in the auto sector that are serving the rural sector such as two-wheelers. Demand for two-wheelers continues to grow despite the tightening credit environment because penetration level of motorcycles and scooters is still low and buyers are able to use cash instead of credit for buying. We also like companies that are linked to the growth in the power sector as it requires a lot of investment.
Do you see FII inflows to Indian markets reversing as a result of the rally and global optimism?
If there is global optimism and rally, India will benefit via capital market flows. Generally, when global liquidity improves and the US dollar weakens, emerging markets benefit. In the last two weeks of March, we have seen some more foreign inflows in the Indian market as well as into several other Asian markets such as Korea and Taiwan.
In March overall, there has been inflows of approximately $75 million by FIIs into India. However, for the year-to-date, FII inflows have been negative.
