Armed with facts and figures, Mr G. Chokkalingam, Chief Investment Officer of Centrum Wealth Management, makes a strong case that the Indian economy is doing much better than people are giving it credit for. In a lively conversation with Business Line, he argues that to make money in equities, investors must keep two steps ahead of both macro trends and corporate profits. Incidentally, his call in December 2010 that investors book profits and raise cash levels proved spot on with markets tanking by 20 per cent since then.

You have a bullish take on the stock market. With the macro-economic indicators clearly suggesting a slowdown, what supports your bullish view?

Most of our problems are to do with normal business cycles and are not structural problems. Take the banking sector. Despite a 375 basis point hike in benchmark interest rates, credit is still growing at 19 per cent. Banks are facing capital constraints because the business is growing faster than their capital. That is a problem of prosperity and not a structural problem as in the Western world.

When we talk of interest rate increases, we worry that they will impact India's manufacturing sector. We give a lot of importance to the Index of Industrial Production (IIP) numbers slowing down. However, manufacturing accounts for only 18 per cent of the GDP in India. Services and agriculture account for 65 per cent and 18 per cent respectively.

Then, there is worry about the ballooning current account deficit. In the first quarter, the deficit was $14 billion against $12 billion last year. However, last year we imported $6 billion worth of gold and this year this shot up to $17 billion. Now, as gold has become an international currency and has actually created wealth, that part of our gold imports which is not re-exported should be excluded when we look at the deficit. If this is done, the current account deficit would be $10 billion against $12 billion last year.

There is a lot of talk about exports ‘plunging'. Now that is completely misleading because India's export growth is still at 36 per cent year-on-year in dollar terms in September. World trade is expected to grow just 5-6 per cent in 2011.

The origin of the recent problems is with the Western world. And I believe that those problems cannot be resolved very quickly. The Western economies may not sink, but they may be stuck with 1-1.5 per cent growth for a while. I am confident that the Indian economy will grow at 7.5 per cent and may be able to bounce back to eight per cent growth quite easily. Look at the experience in 2008 post-Lehman. China spent 15 per cent of its GDP in stimulus packages, India spent only 1.5 per cent. Yet the economy bounced back to 8-8.5 per cent growth over the next two years. That shows the dominance of domestic factors in India.

What is your view on the stock markets, after the recent correction?

I think the markets are already discounting the risks to earnings. The Sensex is now back to July 2007 levels. Yet between 2007 and now, India's GDP at current prices is up by nearly 100 per cent. Bank credit is up by 106 per cent compared to 2007. Sensex company (trailing) earnings are up by 40 per cent over this period. If you look at exports, they are up from $17-18 billion to $24-25 billion in this four year period. All the macro parameters have taken a vertical shift.

Yes, there will be the usual questions about whether the FII money will come back and so on. However, FIIs did come back in 2009-10 and will do so again. They have not much choice, as their own economies are growing at 1-1.5 per cent. India's GDP, if you include a seven per cent inflation, can grow at 15 per cent in nominal terms. Corporate earnings have historically grown at 1.1-1.2 times GDP growth. With the rupee just off Rs 50 levels, the downside on currency too is limited.

When fear psychosis plays out in the markets, prices do not reflect fundamentals at all. 95 per cent of the people will follow the crowd and may not make any money. It is the five per cent who manage to forecast trends ahead of the others who will make money.

Corporate earnings have not kept pace with GDP growth in recent quarters. Your comment?

That's correct. The impact of monetary tightening and higher commodity prices have impacted earnings growth for companies in the first two quarters. However, if you look at the top-line growth for Indian companies that was still very robust. Commodity prices have come off by 15-20 per cent in the last two months. Interest costs too will reverse from the January quarter.

Good monsoon and record food grain production will help moderate inflation. In any case, the rate of increase in price levels (inflation rate) will certainly moderate. Both the key risks to earnings are likely to recede.

Wealth managers in India do not seem to add much value. They market mutual funds, ULIPs and fixed income products. What is your take on this and how is Centrum trying to add value?

In some asset classes, wealth managers end up functioning as distributors. However I see two areas in which wealth managers can add value. One, is through tactical asset allocation- deciding how an investor should distribute his portfolio across different asset classes. We asked investors to hold 40 per cent in cash in December 2010.

Now we are asking them to buy equities. These calls, if they work can really make a big difference to wealth. Secondly, I believe that within equities, there are a number of wealth creating stock ideas that are not aggressively marketed at all. Many stocks get ‘researched' after they have been “discovered and re-rated”. I think the true wealth manager should look for opportunities in stocks well ahead of the market.

What asset allocation would you recommend today to an investor? Should investors hold any cash at all?

I would advise 40 per cent in equities, 40 per cent or so in cash and equivalents and the remaining in gold and real estate. I believe that there is limited possibility of worldwide recession, but I could be wrong. That is why I'm asking investors, for another quarter or so, to hold 40 per cent of wealth in liquid investments which can be converted into cash immediately. If the recession does materialise, the value of your cash equivalents can simply soar.

Equities will be decimated in that case, but your wealth will be protected. At no point in time will I advise a more than 50-60 per cent allocation to equities. I think the risks of equity investing have gone up manifold due to huge volatility caused by news flows and perceptions.

We firmly believe that the worst is over for the Indian equities and we are fully invested within equity segment. We expect the reversal of interest rate cycle, firming up of the Indian rupee, recovery in the industrial economy and larger inflow of FII investments to materialise in 2012. This should lead to better equity performance. The risk to our view would be any massive spike in crude oil prices.

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