‘India looks good in a challenging emerging market world’

Prime Minister Narendra Modi is in the US, hard selling the India growth story to global corporations and investors. While there is a lot of optimism over India’s growth prospects, Bloomberg TV India speaks to Geoffrey Dennis, Head of Global EM Strategy at UBS Investment Bank, and Ajay Mehra, founder of Foresight Global Investors, to find out the actual mood of investors and what more they expect from India.

The context for this conversation has been set by global developments of the past few months and the run-up to Modi’s visit. The first question to you, Geoff, as far as the environment and the mood is concerned around India as an emerging market. You spoke about it extensively a year ago and today if I were to ask you to recap the way the world looks at India because the Indian Prime Minister is here and he is telling companies to invest in India… What’s the mood around India?

Dennis: I think it’s a very tough world for emerging markets like India, where there are great doubts about the growth story in emerging markets. Of course, at the moment, we are very concerned about China in particular.

We know India is a standout performer in terms of the growth of the economy but we also believe that the corporate sector in India, in terms of conventional measures — earning growths or return equity — is really doing very well as compared to the emerging markets overall. At the same time we are well aware of what the constraints are in terms of getting structural reforms approved in India.

So you are adding constraints of structural reforms because you weren’t saying that a year back.

Dennis: No, no, I am just saying that passing structural reforms is challenging but the structural reforms, we believe, will continue to move ahead over the full term of Modi's prime ministership.

So how important would those two reforms be important for the mood because back home in India many people argue in the policy establishment that please look ahead of the land amendment, please even discount the GST to a certain extent…

Dennis: I think what people want is foreign investment in India. They want to know the growth will stay. Growth is very scarce right now in emerging markets. If you look at some acceleration to that, which we think you will get over the next year or two, the structure reforms will help.

I don’t believe that’s the most important factor here; the most important factor is the growth stories itself and the performance of the corporate sector.

And very importantly now, with the effective elimination of current account deficits over the last two years, India is a more defensive market now than it was during the so called “Taper Tantrum” in 2013 and at the same time you have got a very highly regarded well respected central bank, the RBI, which is going to be reducing interest rates. So that’s our story. It looks very good in a challenging emerging market world.

India looks very good in a challenging emerging market world. Ajay, your assessment on the same point first…

Mehra: I generally agree with Geoffrey — it’s the best house in a bad neighbourhood kind of a thing. We invest globally.

We are not just emerging markets investors. So it’s just one piece of the puzzle. But I think for emerging market investors they have no choice but to go to India right now because it’s one of the more stable currencies down 4-5 per cent. From investment standpoint, the returns have to be evaluated by the investor in their home countries’ currency — whether I am a dollar-based investor, whether I am a Europe-based investor. So, more than the growth element, the market is cheap now.

And volatile too…

Mehra: Somewhat volatile but not as volatile as other emerging markets but this currency element is the most important from our view point. So, if the inflation is coming down, I think the RBI is going to cut rate. If the currency just stabilises, it doesn’t need to appreciate, I think things would be very good for India for all the reason that Geoffrey sited.

We look at top down valuations because we are very attractive now. I think it’s a big beneficiary from falling oil prices. It is one of the only emerging markets that are a beneficiary of falling commodity prices in general — it’s a net commodity importer as opposed to exporter.

Why do I get to hear whispers, if not full blown voices, being a little sceptical with the mood changing around and I am not just talking about stock markets specific but overall macro and the India growth story that was so bullish a year or 14 months back?

Mehra: I think you have to distinguish between portfolio investment and foreign direct investment. I think those are very different things. What Geoffrey and I do basically, I am a sort of money manager and he is an astrologist. So we are basically looking at investing our capital that come and go. There is not much benefit to India from that kind of investment.

The only people who benefit are the guys who own these corporations. It’s the industrialists who benefit from that investment. What I believe the PM is seeking, or should be seeking, is FDI directly from companies to go set up, make direct investment, long-term investment, and create jobs and transfer of technology.

So from what you have heard, are you happy with the kind of schedule that the PM is keeping?

Mehra: Frankly, I have not seen his schedule but I think he is a great brand ambassador for India and I think he thinks like a businessman and he has a good economic hat on it. You know there are all this comments about his foreign travel but I think he is doing a great job by creating the climate and the vision for people to come and go and invest.

You have to understand some of these large corporations have been bruised after investing in India, whether it’s for tax reasons, whether it’s return reason. So he has to repair some of the damage and say look it’s a new country, I am going to ease the sort of the difficulty of doing business in India and we have an attractive market.

Dennis: I think the way I put it is to say that when Mr Modi came into office there was high optimism and it was all about delivering reforms. A lot of people put money into India. So I think the uncertainty is that growth is going to pick up. We haven’t really seen growth pick up yet.

Obviously they redefine the GDP numbers to generate some more growth. Growth is now in the 7 per cent to 6 per cent range but the real pick up we haven’t really seen. That’s the reason why people are really sceptical about the growth. But we believe that growth is coming through.

We believe that the balance sheets are improving, we believe the reforms will gradually come through, we think interest rates are going to come down. And we think what’s very significant is the stability of the rupee in contrast to the worldwide currencies, which are under a lot of pressure.

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