There is no bubble in the market
India has a very unique economic model, and unlike other economies it is not dependent on the US economy for its GDP growth.
By Deeptha Rajkumar, TNN |
India offers reasonable safe returns in the emerging market space. India has a very unique economic model, and unlike other economies it is not dependent on the US economy for its GDP growth. Going ahead, inflows into the country is likely to increase further, says Kotak Securities vice-president (research) Ketan Karani.
Is the current market trend a bubble?
No. It is not. The rise in the market is based on strong economic growth and huge liquidity flows into all emerging markets. And among all emerging markets, the best growth markets are China and India. On a GDP basis, India is the world’s second fastest growing economy. The market movements after the Ben Bernanke rate cut has been fast to some extent, but one should take into account the liquidity factor.
While the rise has been baffling, the rate cut was an indication that the US Fed is trying to help the economy, prompting global investors waiting on the sidelines to invest in a big way. This is evident in September, which saw FIIs invest close to $4.1 billion. The market is providing investment opportunity for funds interested in investing into risk assets.
Globally, the appetite for risk assets has increased. India in particular has a very unique economic model as it is dependent internally for its GDP growth. Going ahead, more and more flows can be expected into the country. It is only recently that people are realising India to be a better investment destination. This realisation and acceptance should divert funds into this market, which will help propel markets to new highs.
So do you see a lot of new investors coming into India?
Apart from traditional investors we are seeing a new class of investors. Hedge funds, sovereign funds, pension funds, India dedicated funds are coming into the market. They have a long investment horizon. The acceptance of India as a viable investment destination is making them come here.
Has the market managed to get the pricing of assets right? Where is the risk?
The equity market is risky. I think the pricing of assets is almost right. There has been a shift in asset pricing. If you look at China it has doubled five times in two years. India has gone up four times in five years. Most emerging markets have moved up. It comes from a realisation that world economies have moved up and the growth opportunities are very bright.
Here, one needs to factor in liquidity. In 2001-02, when we were in a recession, the liquidity factor was much more benign. Now, it is in surplus all over the world. There has been a global shift in investment destinations, with US and Europe being relatively less favoured.
One sector that you are looking at from a 2-3 year perspective which may look bearish right now?
IT is one of the sectors that could provide good returns 2-3 years later. If it copes up with attrition rate, an appreciating rupee, they will come out winners. These are testing times for the sector which is looking to reinvent itself. From around 13,800 to current levels, IT has been a big laggard.
But three years down the line, we see a lot of restructuring as firms have huge cash surpluses and robust business models. The only fear is that PE multiples will contract if growth in revenue and profitability is affected. Cement is being perceived as not having performed well. If economy is growing at 9.5-10%, cement should be growing at 1.2 times the economic growth. So, 12% would be the expected rate of growth. But in the past two quarters they have not performed well in the production and despatches front.
If India’s growth story becomes more pronounced over a period of time, cement cannot be a laggard sector. It needs to perform better. So cement can be looked at from performance side.One sector that could be looked at is the education sector which could be a big winner 5-7years down the line.
Where would you recommend investors invest? Are valuations high?
Cement valuations are not so high and there is scope for appreciation. Otherwise we are comfortable with large-caps and some mid-caps. Larger companies have bigger scalability models and the management bandwidth. Better to take a sectoral view. So, one could look at capital goods, India infrastructure, banks and property from a long-term perspective i.e. 1-3 years. We are bearish on pharma and sugar sectors. Two-wheelers could also face some challenging times.
Do you think the rise from 17,000-18,000 was fast?
I think 16-18,000 was reasonably fast and what propelled it was the huge investment flow. But this is true of almost all emerging markets, be it India or Hong Kong.
Is the current market trend a bubble?
No. It is not. The rise in the market is based on strong economic growth and huge liquidity flows into all emerging markets. And among all emerging markets, the best growth markets are China and India. On a GDP basis, India is the world’s second fastest growing economy. The market movements after the Ben Bernanke rate cut has been fast to some extent, but one should take into account the liquidity factor.
While the rise has been baffling, the rate cut was an indication that the US Fed is trying to help the economy, prompting global investors waiting on the sidelines to invest in a big way. This is evident in September, which saw FIIs invest close to $4.1 billion. The market is providing investment opportunity for funds interested in investing into risk assets.
Globally, the appetite for risk assets has increased. India in particular has a very unique economic model as it is dependent internally for its GDP growth. Going ahead, more and more flows can be expected into the country. It is only recently that people are realising India to be a better investment destination. This realisation and acceptance should divert funds into this market, which will help propel markets to new highs.
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So do you see a lot of new investors coming into India?
Apart from traditional investors we are seeing a new class of investors. Hedge funds, sovereign funds, pension funds, India dedicated funds are coming into the market. They have a long investment horizon. The acceptance of India as a viable investment destination is making them come here.
Has the market managed to get the pricing of assets right? Where is the risk?
The equity market is risky. I think the pricing of assets is almost right. There has been a shift in asset pricing. If you look at China it has doubled five times in two years. India has gone up four times in five years. Most emerging markets have moved up. It comes from a realisation that world economies have moved up and the growth opportunities are very bright.
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Here, one needs to factor in liquidity. In 2001-02, when we were in a recession, the liquidity factor was much more benign. Now, it is in surplus all over the world. There has been a global shift in investment destinations, with US and Europe being relatively less favoured.
One sector that you are looking at from a 2-3 year perspective which may look bearish right now?
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IT is one of the sectors that could provide good returns 2-3 years later. If it copes up with attrition rate, an appreciating rupee, they will come out winners. These are testing times for the sector which is looking to reinvent itself. From around 13,800 to current levels, IT has been a big laggard.
But three years down the line, we see a lot of restructuring as firms have huge cash surpluses and robust business models. The only fear is that PE multiples will contract if growth in revenue and profitability is affected. Cement is being perceived as not having performed well. If economy is growing at 9.5-10%, cement should be growing at 1.2 times the economic growth. So, 12% would be the expected rate of growth. But in the past two quarters they have not performed well in the production and despatches front.
If India’s growth story becomes more pronounced over a period of time, cement cannot be a laggard sector. It needs to perform better. So cement can be looked at from performance side.One sector that could be looked at is the education sector which could be a big winner 5-7years down the line.
Where would you recommend investors invest? Are valuations high?
Cement valuations are not so high and there is scope for appreciation. Otherwise we are comfortable with large-caps and some mid-caps. Larger companies have bigger scalability models and the management bandwidth. Better to take a sectoral view. So, one could look at capital goods, India infrastructure, banks and property from a long-term perspective i.e. 1-3 years. We are bearish on pharma and sugar sectors. Two-wheelers could also face some challenging times.
Do you think the rise from 17,000-18,000 was fast?
I think 16-18,000 was reasonably fast and what propelled it was the huge investment flow. But this is true of almost all emerging markets, be it India or Hong Kong.
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