The Switzerland-headquartered global financial player, Credit Suisse Group AG, is gradually expanding its presence in India. From setting up its investment banking and wealth management divisions, the group is now in process of setting up a bank branch in the country, for which it got a licence from the RBI in August 2010. Mihir (Mickey) Doshi, India CEO at Credit Suisse, speaks to Shyamal Majumdar and Vishal Chhabria about his views on the markets and the group’s plan for India. Excerpts:
A few months back, when the Sensex was at 17,000, you said that you were expecting a 15-20 per cent correction. But markets have gone up since then.
Our analysts had raised the risk of a 30 per cent correction if FII flows disappointed, but net foreign buying has been at record levels. India has attracted some $26 billion of net buying by foreigners so far this year – half of all the net foreign buying in emerging Asia excluding China.
We do believe that the Indian markets are now highly dependent on foreign flows. All of the risks in the market - inflation, the current account deficit, low deposit growth and the fiscal deficit - become muted in the presence of capital flows and, if India delivers on growth, our view is that those flows should persist.
And who would have thought that liquidity would come to the market in this manner? I am bullish on India and I am bullish on corporate India, but the biggest driver of the market has been liquidity. Who would have thought that in the month of October, we would have $6.4 billion of net FII inflows? It’s a staggering number, which we have never seen in our markets.
Where do you see the markets going from here on?
We have had a great run and a correction is not out of the ordinary. But the sell-off hasn't been due to any India-specific factors – once again there have been concerns on the global macro and European debt fronts.
The Indian market also has the support of a strong corporate earnings performance and, while multiples are no longer in the value zone, they aren't overly stretched either except in case of select stocks.
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QE2 will also provide additional support to global growth and export liquidity to emerging markets, which will help support Indian stocks. India has been a preferred destination for foreign investors because of its strong growth and pro-growth and pro-investor policies. The market’s capacity to absorb these flows has also increased because of the fairly high current account deficit and the government’s large disinvestment program – large IPOs like that of Coal India certainly help to mop up foreign capital inflows.
So I think that, if we do see a correction, we are going to see more money coming in as investors take advantage of a buying opportunity. Our target for the Sensex is 21,500 and we remain positive on the market in the near term on the back of QE2 and dovish RBI policy.
Recently we have seen concerns over the Chinese government planning to put brakes on the economy. How do you think that would impact the global markets?
The markets have been down on the back of renewed sovereign debt concerns in Europe, as well as that interest rate hike in China. I think the normalization of monetary conditions in China will be another catalyst which will steer the markets. Having said that, we see signs of stronger economic momentum in China lately. Our economists don’t believe one rate hike will do much damage to the real economy, but this may be followed by many more.
But how much of this rate hike is the market discounting currently?
We expect to see a 50 basis point rate hike in the near term. We also expect 100 basis points of increases on average for 2011.
There has been some bad news from the European region too. What kind of developments could take place and do you expect the problems to come up again?
Obviously, there is pessimism about these economies. But we do not believe this is a systemic crisis. Our analysts estimate that the additional costs to the governments of Portugal, Ireland and Greece from private sector write-offs could be around €110-140bn, while there is €670bn available via European Financial Stability Fund and other programs. We also think the situation in Spain is sustainable at present, unless their financing costs rise dramatically.
Our analysts think that eventually the EFSF will be accessed, although not by Spain. Crucially, this will not involve a haircut for bondholders – and it will reduce funding costs to sustainable levels. So the current implied default rates priced in for Ireland and Portugal are too high.
The bottom line, in our view, is that there is a near-zero chance of core Europe walking away from peripheral Europe, as this would cost them at least $600 bn according to our estimates.
In India too, we have seen growth in IIP slip. Isn’t that a worry?
We have had a good run - I think corporate India has really had a great run in the last three years.
Last Friday’s weak IP release was disappointing, but we don’t think India is in the midst of a broad-based stalling of economic activity. We also look at other indicators for the industrial and service sector, and proxies for demand. These include power requirement, transport activity, telecom subscriber additions, mortgage disbursements and new orders by engineering companies, among others. The IP index seems to be providing something of a misleading picture given the unusual volatility in the capital goods index. Meanwhile, most of the services sector indicators our economists examine look reasonably robust.
Many see asset bubbles being created. Do you think valuations are stretched now?
I would probably tend to agree on the asset point. It’s happening across all asset classes. Within equities, it’s also clear that capital inflows have helped make many emerging markets very expensive, not least in Asia. According to our price-to-book versus return on equity valuation model, India and Indonesia are more than 30% overvalued relative to the MSCI Global Emerging Markets index.
But there are factors supporting these high valuations. Consensus Earnings Per Share forecasts for 2010 suggest a 44% increase for India over 2007. Indian equity valuations are also not as stretched as they were in 2007-2008, when the multiples were higher.
Again, these valuations are driven by the current liquidity in the market. We are seeing more easing in the US and the liquidity that generates is going to drive prices.
You see markets still having an appetite for larger issues?
I believe that it will continue to be possible for us to place larger issues. Good public sector companies that are well managed and well run will be easier to sell. That is where you will see the large players willing to invest with a long term perspective. Investors in infrastructure, power and coal are able to play the India growth story extremely well. It also makes it easier for investors to look at big divestment IPOs if there is clarity upfront on what the government’s plans are for that company.
On the growth side, we haven’t seen any major pick-up in domestic infrastructure space, while from the macro point of view the fiscal deficit is down primarily due to 3G money. This is not sustainable. Aren’t these concerns?
It’s a half-full, half-empty glass syndrome. The pick-up this year has been pretty slow compared to what was expected. In March, Kamal Nath had said that he wants to take the road construction from 7 to 20 plus kms a day. It’s somewhere in between right now. But I am an optimist. Yes, the pace could have been faster and the potential is far larger than what we have achieved. But there is no denying that a lot of progress has been made in roads, ports and power.
So what are the real concern areas?
We all expect growth to be driven by domestic demand. If that slows down, it will be a cause for worry. The agitation over natural resources is another. But frankly, I don’t have any major concerns. There is money available for financial closure of projects; we have enough people willing to invest; so what’s the problem? Some people will say, why are we not growing like China has done at 10 per cent-plus? But we have a very different economy with its own challenges and there is no end to such arguments.
Are you comfortable with corporate performance in the second quarter?
More or less, yes. Earnings this quarter have been marginally below expectations, while aggregate earnings have grown 26%, or 10% without the oil companies. It could have been better, but the heady pace of growth can’t continue forever. We expect corporate earnings to grow at 25 per cent over the next two years. Most companies here are connected to the India growth story and, if you talk to any company, there is optimism across all sectors.
How do you see the M&A pipeline?
On outbound acquisitions, I think corporate India is still digesting what it has done in the past two years even though the aspiration to go global is still there and will increase. But for the time being, the opportunity within India remains huge, so many companies will be happy growing at home.
I think inbound and intra-country M&A deals will pick up. I can see more MNCs are talking about India and are willing to pay a premium, as we have seen recently in the pharmaceutical sector. Companies that have sold their domestic businesses will also eventually go global if the price of assets goes down further in the West.
When are you opening the first commercial banking branch?
Our expectation is we should open our Mumbai branch by March or April next year.
I think our application for this license demonstrates our long term commitment to Indian clients and the financial services industry here. The bank branch will allow us to make a bigger contribution to India’s financial sector and economy and we’re very excited about being a participant in the Indian banking system.
In particular, this license really allows us to deliver our integrated banking model to clients in India. Our combined wealth management, investment banking and asset management platform is a distinctive feature of Credit Suisse and we think it’s very relevant for India, where many large companies are owned by promoters or families who also have sophisticated wealth management needs.
Are you late? The approval came in August.
Not really, it’s a long process. But I am certain we will make our presence felt through a much stronger offering to clients. The branch will be able to accept deposits and use its balance sheet to provide financing to clients, complementing what we already do through our Non-Bank Financial Company. We’ll also be able to deal in Indian Government securities, other fixed income products and foreign exchange. The bank branch will really take Credit Suisse to the next level in India.
Do you think private sector IPOs would get crowded out because of the huge PSU issues?
Not really. I get nervous only when I see hoardings all over town from companies of all shapes and sizes rushing to the primary market.
