China now, India for long term

SMART TALK/ Dr. P. Brett Hammond, TIAA-CREF

At a time when foreign institutional investors (FIIs) have been sellers, there are some like Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), who are still calm and don't feel jittery. The company is one of the world's largest retirement systems and leading institutional investor offering a wide range of services spanning from insurance, retirement plans, mutual funds, institutional asset management to real estate. It is a mission driven organisation serving people from the academic, medical, cultural,and research fields in the United States for nearly 90 years. TIAA "� CREF's chief investment officer, Dr. P. Brett Hammond shares his outlook on the global markets, India's long term potential and the sectors that he likes with Priya Kansara.
Excerpts.

Were you affected by the subprime crisis?

We took a right call in case of the US subprime crisis. Near the end of 2006, we started feeling that there was an unsustainable residential housing bubble in the US, which could be the most vulnerable part of subprime. We searched through our portfolio to ensure that we didn't have securities that contain the subprime or companies who were most exposed to the same. We got rid of them and today we have almost 'nothing' in subprime.

Is the worst over on subprime?

It is not necessary to say that the worst is over. But, we think that in the later half of this year, we will see some kind of bottoming out in the housing market and we will begin to see an upturn. So, I think some hit is still left for the first half of the year, but it will not be as severe as in the recent times.

How will the global economy be affected?

I don't think that the global economy will be deeply affected because the subprime crisis affects most directly financial services firms and residential housing and has not spread so far to other sectors in the US. What is happening is that countries all across the world including India are facing a tailing off of economic growth. Though growth in India will come down a bit; it will still be highly favourable as compared to other countries.

How will the US economy fare in 2008?

Our GDP growth forecast in 2008 is about 2.2 per cent with about 1 percent or less in the first and well over 2 per cent in the second half. We believe the chances of a recession in the US economy are less than 50 per cent, but any serious unexpected shock could rapidly change that picture.

What is your outlook on the global markets?

Our experience as an investor is that markets could be volatile for a long time. For example, in 1998, markets were in free-fall, but it recovered very quickly. Same thing was experienced in 2001, when things were very down due to 9/11 attacks, but then, they came back up.

On the other hand, in 1973-74, markets went down and didn't recover for a long time. We are not in a position to say what is going to happen. But, we continue to see volatility in the global markets. Perceptions are very negative all over the world. A year ago, even bad news was shrugged off, but now the good news get shrugged off and the bad news is taken to heart.

Are you worried about the current volatility in the Indian markets?

We don't have a short term focus and our investments aren't driven by volatility over short periods of time. We have longer time frame of 2-5 years for individual equities and more than 5 years for our products like our insurance company's general account. We do have mark-to-mark investments but in most cases we look at individual securities and decide whether it will outperform over the next three years. In any case, we believe the premium is higher in remaining invested for a longer time rather than getting in and getting out. 
 

BIG BUCKS $ billion
AUM	438
Equity investments	220
Emerging markets	4-5
India	0.5

Will India witness robust flow of foreign money?

Flows to Indian equities could see a small pause but the prospects for Indian equity markets are good because growth is grounded in solid broad-based economic fundamentals.

Do you agree with the argument of India's de-coupling with the world market?

I do not buy the decoupling argument as a total explanation. India is a part of global economy, so it is going to be exposed to the changes in the global economy. It is true that India is much less exposed as it has fewer exports as a percentage of GDP as compared to other countries. But, that doesn't mean it has no exposure. The decoupling question makes more sense in terms of the extent of variation and not as a yes or no.

Corporate India's growth rate is cooling off. Your views.

Though corporate earnings growth is slowing down, it is still better than in the US. We continue to certainly see good growth in Indian companies, even over the long run. But, it is difficult to answer whether that is going to happen in every year, because even US companies do not have good growth every year.

What is your investment style?

We buy individual companies and do not make a country or sector bet. We have sector analysts, who constantly look across wide range of countries and try to find out which company in that particular sector can outperform our benchmarks in the next three years. We do keep a watch on the company and move to another company in the same sector if the former begins to trade near fair value. At the same time, we have to be very careful about not being overweight on a particular sector, stock or market capitalisation.

What sectors do you prefer in India?

We have been pleased with some transportation companies in India. We are also actively looking for some financial services (including banking) and infrastructure companies, as we feel that some companies in these sectors are still undervalued. But, besides these sectors, we are pretty broadly focused and have some exposure across all sectors in India.

What is the time frame you adopt?

We may purchase and sell securities within India from time to time as we want to take advantage of new opportunities. But we don't try to move in and out of India.

How do you compare India vs China?

China is very popular in terms of the place to invest and it is growing at a double digit GDP growth. But, India is very attractive long term play, because of the changes that are happening in the country. Firstly, the demographics in India are favourable with nearly half of the population under 26 years of age.

Secondly, the commitment of India towards economic growth and infrastructure is very encouraging and looks like this will continue. Lastly, the education system provides good support, which bodes well for the long term with higher stream of educated people. So, we are positive on China for the moment, but, India over the long term.