With the rest of the world recovering after the global financial crisis, Mark Mathews tells Krishna Merchant that investors don’t need to own the Indian shares like they did in the last two years. Edited excerpts:
Indian markets have been on a free fall for the last few weeks. Do you see redemption pressure from overseas funds and institutions that invest in Indian equities?
Not really, but there has been re-allocation of funds to markets in north Asia, which are perceived to have correlated economic growth from markets like India, that are perceived to have uncorrelated economic growth. When I say correlated, it means correlated to the global growth.
What is worrying overseas fund managers? How long do you see the correction lasting?
It is all because of the global growth. Indian markets tend to do well when rest of the world does not as India’s economic growth mainly comes from domestic consumption, which is much higher than other countries in Asia (around 65 per cent of the total GDP). The problem for Indian markets is that, rest of the world seems to be getting better in the third year after the global financial crisis. It looks like there is real recovery in the US. Hence, investors don’t need to own Indian shares like they did in the last two years. Overseas investors are buying stocks in the developed countries in Asia that export a lot to the developed countries like Korea and Taiwan.
After the correction seen since the onset of January 2011, are market valuations still expensive?
The market valuations are expensive relative to rest of Asia. Indian markets are trading at 17x 1 year forward P/E where as Indonesia is trading at 13x. However, I don’t think India’s fairly rich valuation is a compelling reason to sell shares. But, when there are alternatives in the large liquid markets of West, India looks very expensive.
Do you see downside pressure on Indian markets continuing?
It is hard to say; I think the money might stay in Asia, but a lot of new money may not come into India. A switch from bonds to equities can be seen in US.
If Europe clocks 1.5 per cent growth and China grows 8-9 per cent, commodity price may rise further. India has to import most of its energy and inflation is also a concern in India.
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Inflation for December was reported at 8.43 per cent. Do you have doubts that RBI may not be able to tame inflation via rate rise?
I don’t think inflation is such a big problem as is made up to be. I think RBI will be successful in tackling inflation. We expect India to grow at 8.5 per cent and the central bank may raise rates by 75-100 bps over the next 12 months.
What is the best way to hedge inflation?
Gold is not a good hedge against inflation as gold prices are high. Among equities, one can look at Reliance Industries (RIL). Nifty is up 100 per cent in last 24 months, but RIL is only up 50 per cent. We also like Gujarat NRE Coke, it has done much worse than Reliance. The stock was down 10 per cent last year while the market moved up about 18 per cent, even though they doubled their coking coal production in Australia. The stock is expected to rise by six-fold over the next two years. The company is sitting on inventory which is equivalent to 40 per cent of the production. Also Australian floods will put lot of pressure on coal prices, and they will average around $140 a tonne this year. The stock is very cheap in terms of valuation.
