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Aarati Krishnan

WITH GBP 1.5 billion under its management, the London-based Dawnay Day group is not big by global financial industry standards. But it has an interesting investment philosophy; it believes in "contra-cyclical" investing. It has built up a substantial property practice by buying up stakes in hotel properties after the 9/11 crash drove prices into the ground. Recently, the group forged an Indian joint venture- Dawnay Day AV Financial Services- to offer wealth management and property investment services.

In an interview with Business Line, Mr Alok Vajpeyi, who heads the Indian operation, sheds light on where the stock and property markets are poised at the moment. Mr Vajpeyi was previously the President of DSP Merrill Lynch Fund Managers.

Excerpts from the interview

There have been a couple of "sell" calls on the emerging markets and foreign institutions seem to be becoming risk-averse. This being the case, do you see the institutional flows into the Indian stock market continuing?

India is in a sweet spot. There are a lot of strongly positive changes that are happening in the economy. So, over a 3-5 year period, I have absolutely no doubt that equities will give you very strong returns, far more than what debt has to offer. But over the next two to three months, the markets could be neutral to slightly bearish.

I say this because — first, there is an overhang of stock because there have been a lot of issuances that have had to absorbed. Second, the results season is on us and that influences stock prices in the short term. Then, the summer season usually sees a flagging of interest, so liquidity is at an ebb. In the short term, these factors could see the markets range-bound. But by March next year, I won't be surprised if we see a 15 per cent return on the (stock) market. So this is a good time to make systematic investments in the market.

But when a bear market happens, even a short one, it is the illiquid stocks that take the biggest hit. You simply can't get out of them. So I'm not a great fan of small investors punting directly in the market. They should take the mutual fund route.

Are you concerned about an outflow of liquidity, due to an interest rate hike by the US Fed?

I think people are forgetting about domestic liquidity, which is improving. Even if the rates do go up in the US, it may have more of an impact on their stock markets. I think that will only make emerging markets such as India and China more attractive. With new stocks and new opportunities continuing to come up, I think this will be an exciting time for India.

I don't think the Indian stock markets are overvalued. Because of this, I don't think anything like what happened in 2000 can be repeated now. This being the case, if the markets do come down, I see cash coming in, rather than going out. I am very bullish. This is a time when investors should be looking at equities as a long-term savings alternative.

Are bonds beginning to look attractive relative to equities, when you factor in the risks?

In bonds, you are seeing a pressure on yields because of increasing credit off-take. There are also the inflation fears caused by oil prices. But I see only a slight hardening in bond yields. Bonds might look more attractive than they did before. But earnings growth will continue to be 15-20 per cent for Sensex companies. Companies outside the Sensex will do even better. So, I see equities continuing to be more attractive than bonds. If bond yields were 10-12 per cent, I would rather be in bonds. But with bond yields moving only from 7 to say 7.5 per cent or so, I don't see the equation (between equity and bonds) changing too much.

Coming to the property market, the Indian market is said to be illiquid. A lot of transactions in real estate also do not happen through authorised channels. Are you, as a foreign investor, comfortable with these constraints?

The real estate market in India is very localised in nature. What works in Chennai need not necessarily work in Delhi. So, we are looking for committed local partners who understand the market and can support us in every locality. As to the market, yes, it will take 5-10 years to become transparent and liquid. But this is precisely why we want to be in the market now. Only in a market with imperfections can you make a super-profit. In any illiquid market, the opportunities are higher because the risks are higher. You can get around the risk by researching the market well and understanding it.

You needn't do too many deals. Even a few may earn you a good return. Over the next 5-10 years, we see the markets becoming more liquid and transparent. But then, the returns that you would be looking at will also be 10-15 per cent. In the UK, you can easily buy and sell a few hundred million worth of property without a problem; but that (10-15 per cent) is the return you can earn.

Property prices in the metros have already shot up by 20-30 per cent in a year. Is this a good time to invest?

It is, because there are a number of opportunities. And there are opportunities simply because supply simply isn't keeping up with demand, especially in the prime locations. Yes, there are sectors where this is being overdone. A lot of money is flowing into putting up large buildings for the BPO sector and everyone seems to be investing in the multiplexes. But in the end, property is all about location. If the location is not right, your investments will go badly wrong. So there will be bubbles in certain segments and there will be a crash. But there will be no across-the-board crash in prices. To draw an analogy with the stock market... If you remember the tech stock bubble, technology stock prices crashed by say 60 or 70 per cent; but the other stocks went down only by 20 or 30 per cent.

How will you put contra-cyclical investing into practise here?

We will be looking for opportunities, when external events depress asset prices. To illustrate, how our philosophy works, when September 11 happened, hotel prices crashed in the US.

But nothing changed in the economy. That is a mismatch that gave us an opportunity to buy very cheaply. So the group was aggressively buying up properties at that time. That's a contra-cyclical strategy. This has paid off well for Dawnay Day. They have managed a 50 per cent compounded annual growth in their business, over 20-odd years. That record speaks for itself.

What are the products that Dawnay Day is looking at for the Indian market?

The joint venture that I'm heading will provide advisory services for a range of financial services- portfolio management, private equity, property investments. Our wealth advisory services will include assets classes such as commodities, derivatives, even art.

I've hired two fund managers. I'm talking to a stock broking business for acquisition. We would also like to set up a private equity fund that will raise money through Dawnay Day's international contacts. We are also looking to be registered as an FII.

On the real estate side, potentially a bigger business in terms of capital commitment, we will be looking at investing in townships and hotels.

But initially, we would like to establish Dawnay Day's track record here with our own money, with smaller deals ranging from $5-50 million in size. Only later, after we understand the market with our own research, will we look to raising a fund from foreign investors.

In the financial services sector, what is particularly exciting for me is that though the segment is highly intermediated, there are very few quality players.

By this, I mean players who will look after their clients before they look after themselves. We are keen on building a long-term business based on integrity and reputation.

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