The Hindu Business Line : Global cues like US slowdown key for Indian markets: DSP Merrill Lynch

Mr Andrew Holland of DSP Merrill Lynch believes that global cues like US economic slowdown are key for Indian markets. He feels that there is still value in the market and liquidity continues to be strong. According to him, India is the most attractive among emerging markets, but valuations are a concern. He sees Indian valuations stretched on strong liquidity. He further mentions that India is seen as a safe haven due to domestic demand.

Excerpts of CNBC-TV18's exclusive interview with Mr Andrew Holland:

Is it safe to say that you are a bit surprised at where the market is and at the pace with which we have pulled back?

It has followed all global markets, so there is no surprise in that, liquidity remains clean but the cues coming out of the US is something, which we should look at. We have a slowdown in the US now quite quickly and there are a number of commentators now looking at GDP growth below 2 per cent versus consensus of 2.5 per cent.

So we have to continue to watch what is happening in the US in terms of slow down there. I think the jury is still out in terms of whether it is a soft landing or hard landing. I think the way to look at it is currencies where we are seeing the dollar weaken significantly. Maybe if you see the Yen-Dollar rate go towards a 110, that might sound a few alarm bells. But we are not there yet and so we don't need to worry.

Why is everyone saying markets are too expensive worldwide is partly because they are expensive but when there are 2-3 bids coming into the US markets everyday, whether it is a private equity fund or whether it is corporate action, that is putting a lot of cash back into the system.

So there is still value out there that people can see and maybe some of the people can't. I think liquidity will remain strong towards the end of the year. But one should keep a watch on the global cues for the next two months.

In the near term what do you sense from your clients in terms of flows because we have sucked in nearly $4 billion in the last couple of months, do you see us carrying on at that frenzied rate?

It might slow down. Obviously, you have got some reasonably sized IPOs coming through and we might see a slowdown towards the year-end as FIIs go on holiday. But I suspect that what you will see is that global liquidity will remain strong towards the end of the year. As allocations start to firm up, unless global cues change, the markets will remain strong and the flows will continue.

Is the rally in our market versus other Asian or emerging markets strictly comparable? How do you gauge things like corporate performance, GDP or macro numbers that have been coming in for instance?

India has actually outperformed in terms of GDP growth apart from China much ahead of every other emerging market. So, India remains a long term attractive story and that is well known.

Indian valuations are stretched in some areas and that will continue to be like that as long as liquidity too remains strong. But when you do look around other emerging markets in Asia, there are now concerns about Korea, Taiwan and Japan and all other developed markets because the currency has started to appreciate and these are big exporters to the US and the world.

India is seen as a safer haven in that respect because it is more domestic demand driven. I would say that in terms of GDP growth to earnings growth, India remains very attractive in all the emerging markets. I think where people get nervous is a little bit towards valuations, and that is why one is seeing a lot of the funds move towards the midcap names where they see long-term potential not only for that company but within that sector.

Where do you see the biggest appetite for the global money coming in?

It has been rotational, as we have probably seen with the Index. I think now the investors are looking towards larger things that are playing out in India over the next 2-3 years. Obviously, retailing, construction and infrastructure continues to be a favourite for all investors. I am seeing a lot of newly listed companies come into the market, which are attracting these flows because they want to be part of that sector, which is growing quickly.

These are the new sectors or new companies, which are attracting foreign inflows. Particularly when you look at retail 2-3 years out, the whole area of logistics, food processing, will continue to attract long-term investors because without food processing and logistics, from farm to super market is going to be difficult.

So infrastructure is being built out in-between, which again will bring in new ideas for foreign investors. These new areas will continue to attract investments going forward.

What have you made out of the surge in real estate stocks and do you sense that there is more institutional appetite for some of them?

For foreign investors, there has been very little way to play the construction boom in India. You can play it through the capital good sector but there are very few listed stocks of size and liquidity, which the foreign investors could actually enter the markets. Obviously, they can do through private equity funds but direct market access is very limited.

So obviously, if we have good companies coming into the market, then these are going to attract foreign investors because they want to play the construction/retail/infrastructure boom that is happening in India and these companies have very strong earnings going forward and very good land banks.

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