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Sunday, Nov 25, 2007
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Business Daily from THE HINDU group of publications Sunday, Nov 25, 2007 ePaper | Mobile/PDA Version |
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Stock Markets Investment World - Interview Markets - Insight Money & Banking - Mortgage We have seen an increase in the attractiveness of emerging markets because people have realised that 75-80 per cent of the global growth will come from here.
MARTIAL GODET, BNP PARIBAS
Shanthi Venkataraman News of write-offs related to sub-prime loans, by global investment banks have been bludgeoning stocks with alarming regularity in recent week. But Martial Godet, Head of Investment Management at BNP Paribas Investment Partners retains quite a positive view on the Indian markets. With much of the global growth set to come from these markets, not being invested in markets such as India would be a greater risk than being there, he feels. More clarity on the sub-prime crisis in excerpts from the interview: There is a view that the full picture about sub-prime crisis will be available only at the end of this year, when the write-offs are completed. Do you go with that view or do you think that markets have already discounted the sub-prime crisis? There are some things that have been discounted by the market at the moment, but not the full picture, because, nobody is aware of the full picture yet. HSBC recently declared results and there was $3.5 billion write down and provision on such assets. At the same time there was a rumour that the losses could be much higher. So there is a huge gap between the rumour and what the banks are saying. The truth may be somewhere in between. Having said that, there are some positive signs. Goldman Sachs has said that they will not have to increase their write-downs further than what they have done so far. What is certain is that the uncertainty will be there for some time. The re-set of those sub-prime mortgages has just started. People who have contracted loans at a much lower level are going to feel an increase in their outgo every month. This is in the context of still falling house prices. If we look at the rate of decline in prices of houses, we still have 5-10 per cent to go before we touch the bottom. So it is quite difficult to consider the end of the housing crisis before the end of 2008. We could say that between March and June next year, we will have a clear picture of how the default scenario is developing. The banks are making provisions on loans that have not yet seen defaults. The defaults might be estimated at 40 per cent for one bank, 20 per cent for another. There is some dispersion in the way banks are assessing the quality of those assets and that will be a drag on the markets for the coming six weeks. This is going to have some impact on the US economy for the coming three quarters- Q4 2007 and first two quarters of 2008 and we should see some sub-par growth during this period. The economy should pick up to potential from the third quarter of 2008. We could see 1-1.5 per cent growth in the next three quarters and 2.5-3.5 per cent thereafter. Having said that, the US economy has some means of facing this situation. The weaker dollar is boosting exports by a significant margin. If you look at the third quarter growth data, 1 per cent has been achieved by exports. Most of the net growth is going to come from exports. What kind of a re-allocation in assets have you seen in assets since the sub-prime crisis? After the Fed rate cut, there was a surge in liquidity into markets such as India….. Yes, to some extent we have witnessed that re-allocation. Over the last 4-5 months, the Indian assets that are advised by our local team (Sundaram BNP Paribas) that are sold to overseas investors have almost doubled. So there is a demand for emerging markets and Indian equities. Investors have panicked about their exposure to developed markets and have wanted to re-balance quite aggressively. After the rate cut, we have seen as much inflows in just 2 months in some emerging markets, as we saw in the first seven months of the year. We have seen an increase in the attractiveness of emerging markets because people have realized that 75-80 per cent of the global growth will come from emerging markets. Stocks in emerging markets have already moved into a valuation premium over developed markets and India especially is at a substantial premium, with the Sensex PE at over 20. Are investors comfortable with those PEs? Yes, valuation is clearly an issue. If you look at emerging markets, specifically BRIC countries, the domestic Chinese market clearly presents all the signs of bubble similar to the bubbles witnessed in Japan and Taiwan earlier. But this is not the case for other markets. Yes, we are at the upper end of the historical valuation ranges. Valuations are more expensive than sometime ago. In India, the historical range is 16-20 and we are at the upper end. In Brazil, the range is about 9-12; the valuation is at 11.5. The valuations are at different absolute levels, but in all these markets they are at the upper end of the ranges. We are, however, at a phase of rebalancing. These markets do not enjoy the weights in international portfolios that they should represent. If you look at Europe, the exposure to emerging markets there is minimal- between 0 and 1-2 per cent. The idea is not to ask them to invest 20-25 per cent in emerging markets but at least 5, 7 or 10 per cent, depending on how aggressive they want to be in this market. There is, therefore, still plenty of room for reallocation. We are going to a phase where the multiple ranges we have had in the last couple of years may shift higher. If the Indian market multiple rises to 30…that will be worrying. At the moment, we are confident that as long as the rally is not going to happen too quickly, there is no reason to be worried. Of course, markets will be volatile and that is something we have to live with. How comfortable are investors with the high impact cost in Indian stocks? We have seen large-cap stocks that move by 15 per cent in a single day. Does that not make institutional investors uncomfortable? That would make any investor uncomfortable. But it is more risky not to be invested in emerging markets than to be invested. The positive returns are going to come from the exposure to unconventional markets. In fact, these markets are becoming conventional. Domestic China plus Hong Kong has a market cap that is bigger than Japan. These markets are considered risky markets but actually all markets are risky nowadays. When you lose 7-8 per cent in a single day in Japanese stocks, it is a risky market too. Of course you should not put all your eggs in one basket. But if you do not have any exposure to emerging markets, it is really a problem, especially, if you have a target returns because you are bound to have volatility but at the same time will not get returns. In the case of India, we were a bit negative on India in the first six months of the year. We missed a bit of the rally that began in April-May. We were able to change our views quickly and now mildly overweight on Indian equities. We like the Indian story because it is less dependent on the international environment and this is the only country where consumer spending as a part of GDP is growing. In China, the growth of exports is growing faster than domestic consumption. If you look at Brazil, it is commodity-led growth. Is the decoupling scenario (which says that emerging markets will tend to respond less to global cues) story more applicable to India than other emerging markets? We can take a stand on market decoupling and then on economic decoupling. For market decoupling, I am not completely sure that Indian market is the optimum bet. But on economic decoupling, it appears to be the best position you can have. In the recent quarters, we have seen some signs of an earnings slowdown in India as well. Industrial production numbers, even if they are not considered completely representative, show signs of a slowdown too. Is this a sign that India’s valuations might not sustain? It is quite difficult to rely on one bit of data. But yes, it is a bit disappointing. The earnings season in India has not been that bad; it has been worse for China. It is not only a question of fundamentals. You cannot completely exclude the influence of flows. A slowdown would, however, be a source of concern if the trend continues in the coming quarters. More Stories on : Stock Markets | Interview | Insight | Mortgage
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