ET NowIn a chat with ET Now, Devan Kaloo, Aberdeen AM says that With Prime Minister Modi we have seen reduction in regulation and I can only hope that that trend continues because that is ultimately the best thing for India.
Edited excerpts:
India has underperformed EMs in 2016. Do you believe it is going to outperform in 2017?
If you look at 2016, the big issue that affected the markets was that it had done very well in 2015 and it lagged relatively everybody else. But then towards the end of the year, we saw the issue with demonetisation and consequences that it is having for economic growth and profits. Demonetisation is a good long-term gain for India and as a result we see through that. By the second half of this year, India will start to do very well and there are number of drivers for that. One, the economy will start to look better, profits look to be better but also perhaps most importantly some of the reform measures are begging to kick in and that stands for a very good story in an uncertain world.
Do you believe valuations have corrected? Are they at more pragmatic level than they were in the past?
Yes I believe so. There are two ways to look at valuations – absolute and relative. In absolute, yes the markets come down a little and things could be better than they were. But actually on relative terms, India looks a lot more attracted.
When will there will be an earnings pick up in India? What will give earnings a fillip? What according to you is going to give earnings a fillip?
If you look at the Indian market perhaps one disappointment has been the time it has taken for earnings to recover. But there are couple of things are coming through here. First, the benefits of low interest rates are eventually going to kick through. Increasing confidence in India’s future led by both corporates as well as consumers which actually get companies and people spending again and perhaps most importantly as we get clearer that the government is really committed to reform and delivering, we will see a pickup in overall sentiment. So it is an issue about sentiment in the short term.
Many people believe that demonetisation perhaps has hit that consumption and numbers tell that story. When do you see that hit consumption bounce back?
Yes, I think it will delay it. So we will have to look to the earnings coming through but I think the most important thing to remember here is that it is delayed consumption, not killed consumption. So sooner or later, it will come back.
Amidst the demonetisation debate, the RBI’s reputation has taken a hit and its credibility has been eroded.
If you look at the bond markets they seem to have very high opinion of the Reserve Bank of India so I would leave it to that. We believe that they are doing a decent job and certainly relative to lot of other central bankers out there in the world very credible.
Your top sector holding in India is consumer staples, it was banks versus benchmarks and other EMs of course what about banks, what about the NBFCs, what about insurance companies in India? You hold about 3.7% in HDFC there is a lot of doubt can HDFC hold ground in a market as competitive as that?
As the banks get better and perhaps as start to recapitalise which is one of the big hopes of the banks. Then we will seek increased competition but ultimately if we see greater loan growth offsetting that will all do that well but within that of course we think HDFC is one of the best banks in India and has a fabulous track record and great management.
You do keep faith in banks despite the fact they are saddled with bad debt, you still are a believer in Indian banks?
Absolutely, When you look at banks they are very dangerous vehicles ultimately because they are very leveraged vehicles.
Your other big holding is ITC what do you like about that company?
When you look at cigarette companies first and foremost there is this idea about premiumisation which India will go through just like everyone else and companies with brands like ITC will do well. But we also like the fact that it has been diversifying its business and continues to do a good job of allocating capital. So ultimately for us we think it is one of valuations because it is one of the cheapest multinationals out there.
Does the burden of tax on cigarette not concern you?
You have periods of concern in India and indeed all countries with regards to tobacco and cigarettes but ultimately what we see is that there is nothing new under the sun right so we understand what the regulatory risks are, we understand what the tax risks. There is offsetting factor and the offsetting factor is that Modi hates the cigarette companies. There is a balance to be struck and ultimately the balance is in ITC’s favour.
Some things are in favour of ITC and HDFC but what is not finding favour with you is Indian IT.
Certainly there is a lot of noise and recent changes in management in Infosys, TCS and indeed in some of the others has created uncertainty but I think the wider issue for the software companies remains whether or not demand is going to pick up and the concerns about protectionism perhaps in the US impacting them.
You know a lot of people here in Davos and otherwise believe that the world is perhaps beginning to see the first few signs of monetary policy going back to where it was, to normal especially with the US Fed and other central banks easing off and waning away the stimulus steroids, what does this mean for the emerging markets particularly India and especially in reference to what the US Fed will be doing and has done?
There is a couple of thing there and it is a very big topic because we are going from unorthodox monetary policy to unorthodox fiscal policy and that carries some risks and potentially great opportunities as well. Ultimately we need proper pricing of capital and interest rates need to go higher for that and if that happens then we will start to see where, whose making the good returns on capital and in that regard I have no concerns about India. Indian companies make a very good return on capital, very disciplined and ultimately are a good long term investment for anybody.
What do you think will be the impact of Donald Trump’s presidency if it were to be what he is saying on markets like India, we have a huge exposure to the US markets whether it is our pharma, our IT and other segments like that?
Indian IT, on a relative basis India is more insulated from the potential risks of Donald Trump but the concern that people have with Donald Trump in particular with regard to emerging markets is that he is going to either stimulate the economy significantly so that interest rates rise and the dollar rises which creates a problem or worse still implements protectionism. And in that regard India actually stacks up quite well in that it is best...
In both scenarios?
In both scenarios, relative to a lot of other countries and emerging markets. If your concern is what are the negatives that Donald Trump could bring then actually India is relatively safe haven within the emerging markets. But that said, the emerging markets would struggle overall.
Name the reforms that you would want the government to walk the talk on?
Well I certainly think that reform around the GST and the proper implementation of that would be great for India in the longer term. The better social welfare transfers and maybe even low cost housing will be a big underpinning for potentially stronger growth coming out of India.
Do you see fear and do you sometimes fear that India is perhaps going down the way of over regulating?
With Prime Minister Modi we have seen reduction in regulation and I can only hope that that trend continues because that is ultimately the best thing for India.
Edited excerpts:
India has underperformed EMs in 2016. Do you believe it is going to outperform in 2017?
If you look at 2016, the big issue that affected the markets was that it had done very well in 2015 and it lagged relatively everybody else. But then towards the end of the year, we saw the issue with demonetisation and consequences that it is having for economic growth and profits. Demonetisation is a good long-term gain for India and as a result we see through that. By the second half of this year, India will start to do very well and there are number of drivers for that. One, the economy will start to look better, profits look to be better but also perhaps most importantly some of the reform measures are begging to kick in and that stands for a very good story in an uncertain world.
Do you believe valuations have corrected? Are they at more pragmatic level than they were in the past?
Yes I believe so. There are two ways to look at valuations – absolute and relative. In absolute, yes the markets come down a little and things could be better than they were. But actually on relative terms, India looks a lot more attracted.
When will there will be an earnings pick up in India? What will give earnings a fillip? What according to you is going to give earnings a fillip?
If you look at the Indian market perhaps one disappointment has been the time it has taken for earnings to recover. But there are couple of things are coming through here. First, the benefits of low interest rates are eventually going to kick through. Increasing confidence in India’s future led by both corporates as well as consumers which actually get companies and people spending again and perhaps most importantly as we get clearer that the government is really committed to reform and delivering, we will see a pickup in overall sentiment. So it is an issue about sentiment in the short term.
Many people believe that demonetisation perhaps has hit that consumption and numbers tell that story. When do you see that hit consumption bounce back?
Yes, I think it will delay it. So we will have to look to the earnings coming through but I think the most important thing to remember here is that it is delayed consumption, not killed consumption. So sooner or later, it will come back.
Amidst the demonetisation debate, the RBI’s reputation has taken a hit and its credibility has been eroded.
If you look at the bond markets they seem to have very high opinion of the Reserve Bank of India so I would leave it to that. We believe that they are doing a decent job and certainly relative to lot of other central bankers out there in the world very credible.
Your top sector holding in India is consumer staples, it was banks versus benchmarks and other EMs of course what about banks, what about the NBFCs, what about insurance companies in India? You hold about 3.7% in HDFC there is a lot of doubt can HDFC hold ground in a market as competitive as that?
As the banks get better and perhaps as start to recapitalise which is one of the big hopes of the banks. Then we will seek increased competition but ultimately if we see greater loan growth offsetting that will all do that well but within that of course we think HDFC is one of the best banks in India and has a fabulous track record and great management.
You do keep faith in banks despite the fact they are saddled with bad debt, you still are a believer in Indian banks?
Absolutely, When you look at banks they are very dangerous vehicles ultimately because they are very leveraged vehicles.
Your other big holding is ITC what do you like about that company?
When you look at cigarette companies first and foremost there is this idea about premiumisation which India will go through just like everyone else and companies with brands like ITC will do well. But we also like the fact that it has been diversifying its business and continues to do a good job of allocating capital. So ultimately for us we think it is one of valuations because it is one of the cheapest multinationals out there.
Does the burden of tax on cigarette not concern you?
You have periods of concern in India and indeed all countries with regards to tobacco and cigarettes but ultimately what we see is that there is nothing new under the sun right so we understand what the regulatory risks are, we understand what the tax risks. There is offsetting factor and the offsetting factor is that Modi hates the cigarette companies. There is a balance to be struck and ultimately the balance is in ITC’s favour.
Some things are in favour of ITC and HDFC but what is not finding favour with you is Indian IT.
Certainly there is a lot of noise and recent changes in management in Infosys, TCS and indeed in some of the others has created uncertainty but I think the wider issue for the software companies remains whether or not demand is going to pick up and the concerns about protectionism perhaps in the US impacting them.
You know a lot of people here in Davos and otherwise believe that the world is perhaps beginning to see the first few signs of monetary policy going back to where it was, to normal especially with the US Fed and other central banks easing off and waning away the stimulus steroids, what does this mean for the emerging markets particularly India and especially in reference to what the US Fed will be doing and has done?
There is a couple of thing there and it is a very big topic because we are going from unorthodox monetary policy to unorthodox fiscal policy and that carries some risks and potentially great opportunities as well. Ultimately we need proper pricing of capital and interest rates need to go higher for that and if that happens then we will start to see where, whose making the good returns on capital and in that regard I have no concerns about India. Indian companies make a very good return on capital, very disciplined and ultimately are a good long term investment for anybody.
What do you think will be the impact of Donald Trump’s presidency if it were to be what he is saying on markets like India, we have a huge exposure to the US markets whether it is our pharma, our IT and other segments like that?
Indian IT, on a relative basis India is more insulated from the potential risks of Donald Trump but the concern that people have with Donald Trump in particular with regard to emerging markets is that he is going to either stimulate the economy significantly so that interest rates rise and the dollar rises which creates a problem or worse still implements protectionism. And in that regard India actually stacks up quite well in that it is best...
In both scenarios?
In both scenarios, relative to a lot of other countries and emerging markets. If your concern is what are the negatives that Donald Trump could bring then actually India is relatively safe haven within the emerging markets. But that said, the emerging markets would struggle overall.
Name the reforms that you would want the government to walk the talk on?
Well I certainly think that reform around the GST and the proper implementation of that would be great for India in the longer term. The better social welfare transfers and maybe even low cost housing will be a big underpinning for potentially stronger growth coming out of India.
Do you see fear and do you sometimes fear that India is perhaps going down the way of over regulating?
With Prime Minister Modi we have seen reduction in regulation and I can only hope that that trend continues because that is ultimately the best thing for India.
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