The Hindu Business Line : `Midcaps may remain in favour with foreign investors'

A lot of investors are sitting on the sidelines waiting for a market correction to happen in India. But if the market rallies further, some more money might actually move in and drive further increases in valuations.

Senior Investment Advisor at Pictet Asia, Sanjay Lodha believes that the Indian market is overpriced and says his firm is underweight on India for now. But he affirms that it will turn positive at a Sensex valuation of 16-17 times. He mentions that the conditions favour higher real estate prices and does not see them coming down. Mr Lodha expects a correction of 5-10 per cent in the markets. Explaining that Pictet Asia is overweight on Taiwan, South Korea, Indonesia and Malaysia, he adds that mid-caps would find greater acceptance among foreign investors.

Excerpts from CNBC-TV18's exclusive interview with him:

What is Pictet's view on India and the way the stock market has rallied to all-time highs?

How one looks at India from a global perspective depends on what your outlook is. If you are a value investor, you are looking at the Sensex for a multiple of around 25 times current earnings and around 22 times next year's earnings. Depending on whom you listen to, you find that value investors at present are not keen on India.

They have alternative markets, which in Asia, are very attractively priced; for example, South Korea, Malaysia or even Thailand. On the other hand, if you are a growth investor, you are looking at the strong fundamentals that India has.

There are strong earnings set to come from Corporate India. At the same time, earnings tend to surprise, year after year, quarter after quarter, and if one is pricing that growth into 2008-09, and one starts looking at India on a peg basis, it is not that expensive.

So one would want to get into India with a longer-term perspective and reap the benefits over a longer period. Therefore, it all depends on one's perspective and time horizon in terms of investments.

Even so, we have come out of a month in which we got the better part of $2 billion — big money for our market. Do you sense there is a lot of money that is still waiting to be invested in a market like ours?

The general sense I get when I speak to the industry and my peers is that a lot of investors are sitting on the sidelines waiting for a correction and lot of foreign investors are looking at India saying that, at the moment, it is a bit expensive and the global financial environment does not look too rosy.

If the dollar meltdown happens, if the US economy slows down, you will see a flight to safety by international investors.

But if the correction doesn't happen, and if India moves a bit further, I guess that some amount of money might actually move in and give rise to further increases in these valuations or P/E multiples.

What has Pictet been doing over the last three months while the market has been rallying? Have you trimmed some of your positions in India selectively or do you remain overweight? What has been your investment stance from a tactical perspective?

From a private client business basis, I think Pictet is very much in the value category and we believe that, at current levels, the Indian market is over-priced and we are also on the bandwagon that is waiting for a correction. But at the same time, for longer-term investors with a time horizon of more than five years, we think it might be time to slowly start accumulating into India because the long-term story is definitely there.

Also, all the arguments for India being among the better investment markets within the Asian context are still positive, and so we are just waiting for corrections in the valuations. Either this happens by corporate earnings surprising on the positive side, or by the market correcting a bit and providing more attractive valuations to foreign investors, and that is where Pictet's stand is today. We are underweight on India at the moment.

You have real estate in your portfolio. How do you feel about the valuations of those stocks and is there anything in the most recent listings that you prefer from the real estate lot?

I would like to talk about real estate in India as a sector rather than individual companies. I believe at the moment, everything is positive for real estate prices in India. One can see multinationals coming to India.

At what levels would you find India compelling, where you would put some more money to work in this market?

It's a wish list around 16 to 17 times earnings.

That is almost 25 per cent correction from the current levels, do you think this market could correct that much?

My view is that we could see somewhere midway between the two, where earnings come up a bit and the market doesn't do anything for some time or maybe corrects about 5-7 per cent. Then, India will become a bit more attractive for players on the sidelines now.

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