www.dnaindia.
com
pick some long-term investments
Given the economy and investor wealth, what is your message to the investor?
Sanjay Sinha: Some bit of the message is reflected by the investor himself. If you
see the funds industry, it has not grown the same way it did last year. The second thing
is investor reaction. In the early part of the previous rally, the participation of the re-
tail investor was very modest, almost negligible. The participation steadily grew,
reaching the maximum in the last 12-18 months. Equity as a percentage of financial
assets continues to be at a low proportion. Even today, most people don’t own a sig-
nificant part of their portfolio in equity. So, even a 40% fall does not erode their wealth
significantly. So, why have investors come in last 12-18 months? They have now be-
gun to believe that the economic growth is going to be sustainable not for just one
year or 18 months. The best way to participate is through equity ownership. That is
one part of assessment. The second part is the erosion of wealth.
The market went up by 42%, 46% and 47% in 2005, 2006 and 2007, respectively. From
the peak we have fallen 40%. If you look at history we have fallen from top a num-
ber of times and bounced back from there over a period of time. In the past, when
the market has fallen so much in 1992 and 2000, it rallied 100% plus from bottom in
2 years time. At present, there is an aura of despondency due to high inflation and
other concerns. But we need to look beyond that. We need to see if this is structur-
al in nature or is it just short term. It doesn’t look structural; it is short-term. I think
this is a buying opportunity.
Madhu, investors understand that markets keep going up and down, whether they them-
selves are investing or not. At this point in time, how does one protect capital —- when
the markets are down?
Madhusudan Kela: Let us unambiguously say this: If you are an investor, if your
timeframe is 3 to 5 years, then these are the best times to buy equity with a lot of stock
prices demonstrating the kind of fear which are not real if you take a five-year view.
From an investor’s perspective, for people who have no substantial part of their
savings in equities as an asset class, this is very clearly time to systematically invest.
In the near term —- say six months —- things may deteriorate. Like Sanjay was say-
Pictures : Apoorva Salkade
Conversations round-table
ing, things don’t look structural. High inflation, interest rates, crude…these are not
things I can see lasting for more than six months.
On the flip side, if you don’t invest in equity, you put your money in a bank. There
wealth is going down for sure. With 12% inflation and 9% interest rate, you are los-
ing money on bank deposits. In equities at least you have a hope of making positive
returns. But the answers are not simple.
Sandip, looking at macro situation, the widespread expectation is that the west will slow
down. How do you see the fundamentals of economy in next two years? Investors will
have to derive their decisions from that. What is your assessment ?
Sandip Sabharwal: The concerns are well known, they are talked about in me-
dia all the time. We know there’s inflation, political uncertainty and tight monetary
policy impacting banking and capital goods sectors. We have to see, like Madhu said,
if this is structural or is transitory in nature, which may remedy itself over a peri-
od of time.
My view is that a slowdown in the western economy is absolutely essential for In-
dia and China to emerge as the next growth drivers of the world. The demise of Japan
led to the emergence of the US. Just see the kind of return the US stocks gave during
the time of their emergence.There are structural issues in the US, which will lead to
the decline of US economy in the next 10-15 years. This will lead to the emergence of
other countries especially India and China and many be other economies like Brazil
and Russia may also do well. Demographics-wise, India is best poised. Resource-wise
Brazil is placed well. China and Russia also have lot going for them.
Whoever is a long term investor should look at investing in a structured manner.
Today inflation is at 12%; six months ago, it was 4%. One year down the line, it may
again go to 4%.
The drivers of inflation are unlikely to persist at such elevated levels for extended
periods of time. There can be high interest rates, there can be low interest rates. But
will the high interest rate kill the investment and consumption psyche of the corpo-
rates and households? I don’t think that’s going to happen. The balance sheets are
leveraged to lesser extents.
Today it’s a crisis of confidence caused primarily by news flow. As we do micro-
analysis, as we meet a lot of corporates, we don’t see the kind of slowdown as reflected
in the macro numbers.
Madhusudan Kela: For a longer-term, the situation is far looking worse than what
it is today in the current year. There is a delta (unexpected negative impact) of $75
billion, which you had not anticipated when you made investments two years ago.
The delta came in two forms. One was rising oil prices. India has had to pay $50 bil-
lion more than what was anticipated three years ago. And $25 billion dollar less in-
flow by foreigners through foreign convertible bonds, equity etc put together
So, for a trillion-dollar economy (there has been) a $75 billion negative unexpect-
ed impact, which is why we are seeing a chaotic situation. If you expect this $75 bil-
lion delta to occur year after year, then you must be very pessimistic —- what the me-
dia is today widely. If you think there is a scope for another $75 billion delta, then
crude must go to $300 per barrel, in which case we are all dead anyway.
We have seen oil prices moderating suddenly over the past few days. We don’t know if
it’s a long-term thing. But oil prices have transferred wealth from one set of people to
another. Sanjiv, do you see any positive in that for India as far as liquidity and money
flow are concerned? Or is it all bottled up somewhere else?
Sanjiv Shah: Before I answer that question, look at the total Indian investment in
the equity markets, it is minuscule. As Sanjay was saying, Indian investors haven’t
really taken huge bets on economy. They have been lending to the government at the
end of the day. Until now, they didn’t have pensions, didn’t have anything else. Every-
body wanted capital safety because of which we didn’t see flows into equity. As we go
forward, you start realising that by keeping money in a bond or a bank deposit the
real value of money will go down dramatically. If I am a investor I got to start look-
ing at asset allocation. Forget growth, if I want to protect the value of my capital, I
have to look at assets like equity. That is going to bring more and more flows into eq-
uity. If you look at market valuations, I feel more and more money has to move into
equity. If you look at RBI bonds, they have collected Rs 100,000 crore. What is driving
that? Safety of capital. Going ahead, safety of capital will drive more money into eq-
uities.
Then comes international flows. International flows, the ability to take risk is com-
ing down due to problems in the US. Money supply will come down. There has been
twenty years of high growth in money supply. That will come down.
Bala, from an investor’s point of view, this should be the beginning of the right time to
invest. Why is not the fund industry able to sell this idea?
Balasubramanian: The point is, everybody wants to come in at 21000 Sensex but
nobody wants to come when it’s 13000.
From the overall economy point of view, in the last few years, we were talking of
fiscal deficit coming down, now we have fiscal deficit going up to 6%. The Indian cor-
porate was leveraged. In the 1990s, cost of borrowing was high. For every rupee in-
vested, there was Rs 2 to Rs 3 debt. Today the balance sheet of Indian corporates is
much stronger and the valuation lot cheaper than in many international markets.
Assets have grown in last the 3 years much faster than in last 10 years.
Look at the reality of funds, how they have grown.
Between January and March, mutual funds could almost match the selling pres-
sure from FIIs.
Not only mutual funds, insurance has also grown considerably. The industry has
matured so much. Investor awareness has also increased significantly in the last one
year or so. People are asking when should I invest in markets. But is it possible to
time market? It’s very difficult.
Despite many crises, in the last ten years industry growth has been 26% com-
pounded annual growth rate. Month after month SIP (systematic investment plan)
flows are increasing.
The uncertainties that we are facing are global in nature. The Reserve Bank of In-
dia governor in his latest speech he said The Indian financial system is much stronger
than US. These are facts which are not coming to foreground. Therefore it’s an op-
portune time.
Sanjay Sinha: To bring to the fore the role of mutual funds, just look at the num-
bers. In the whole of 2007, they bought Rs 6,700 crore. This year they bought over Rs
10,000 crore. So participation of mutual funds has been far higher. Look at the con-
tribution they have made to change the investor psyche.
Look at the two falls of May 2004 and May 2006. In these, the investor reaction was
negative. But on both occasions, they were inactive. This year, mutual funds are buy-
ing. How are they doing so? Because they are seeing inflows. In our funds, right from
January, we have seen net inflows almost everyday. I travel all over country. We go to
Tier II and Tier III towns. They are not asking should they put money into equities.
Investors are asking when they should put money.
Madhusudan Kela: Equity is the only commodity where higher is the price, high-
er is the demand and vice versa. That’s because of greed and fear. However, scientif-
ically you try to justify, much money will not come at the bottom of the market. But
I think the industry’s effort and the media role should come in here.
There is a lot of wishful thinking that when mutual fund redemptions happen, that
is the time market will bottom out. That will remain just wishful thinking.
About 85% of the retail investor base of 65 lakhs have put in less than Rs 50,000.
That is the level of penetration we have achieved as an industry leader. I am sure if
the media plays a more positive role, we can take the message across to them.
Sanjiv Shah: The Indian investor has no choice to move into equities. Until now,
real rates of interest have been higher. But with the scenario changing, we think the
65 lakh number will move into 65 crores in short time. That process is on and it’s go-
ing to get accelerated.
Mihir, quite obviously the investor has not panicked. He is not pulling the last rupee out
of mutual funds. How would you sum up the macroeconomic and investor sentiment in
terms of plusses and minuses? Do the pluses outweigh minuses?
Mihir Vora: If you ask this question in terms of timeframes, if you are looking
at a 3-5 year timeframe, I can see very little minuses. We have three or four pillars —
- demographics, infrastructure, consumption and outsourcing. We look at sectors in
each of these themes. There are very few sectors that won’t do well in each of these
spaces. Whether it is capital goods, construction or FMCG, Telecom or information
technology. On none of them can you say with conviction that they won’t do well in
the next 3 to 5 years. In the short term, there are concerns. The correction should
have ended —- if we had the same global macroeconomic and commodity prices —-
around Sensex 16000-17000. The fall from there was due to the incremental negatives
that have happened post correction: oil shooting up and other commodities rising.
The short-term scenario can’t sustain. We are already seeing demand destruction.
The world cannot afford such high commodity prices, more contraction of demand
will happen and when that happens, we will see economies like India and China who
are net users of these commodities, doing well. Globally, if you look at the financial
markets, till last year India and China were stars of global system. Now with the rise
in commodity prices, despite the crash in global markets, countries like Brazil and
Russia have gone up because they are commodity exporters. Once the commodities
correct, sooner or later, it’ll back to China and India, which are local stories.
It’s only a matter of time. Structurally, the story is intact. Where we are today is
partly our own making. We should have probably done more in the infrastructure
space faster
But a 10% growth may not be possible from here. But 7-8% is very much sustain-
able. It’s just a question of time.
Madhusudan Kela: The last point on the economy. If you take a three-year view,
even if oil prices remain where they are today, India will actually spend less money
by 2011 compared with today because we will by then have $25 billion worth of crude
and crude equivalent savings happening due to availablility of local crude and local
gas. And, if you look at the picture of $120 billion dollar worth of oil exports, and if
you take my $25 billion number at face value, on a $1.7 trillion economy, in percent-
age terms, the expenditure is quite reasonable. Remember, here we are still assum-
ing 5% growth in oil demand.
Point no. 2 is that let us look at the Indian economy vis a vis global — our growth
falling from 9%-10% to 7.5% looks like chaos. Imagine a $12 trillion economy like the
US —- they are struggling, struggling to grow on a notional basis at 3%, including in-
flation, whereas here, including inflation, you are growing at 14%-15% (7% growth
and 8% inflation) this year, and continue to do so. I don’t think the relative impor-
tance of India in the world of investing can be ignored for a longer term for institu-
tional investors. It’s a greed and fear game. People are so fearful they don’t want to
analyse and look beyond 6 months…
Sanjiv Shah: Just one technical point about inflation, even if commodity prices
remain as it is at the current levels, on a year on year basis inflation will automati-
cally start to fall due to the high base effect.
Madhusudan Kela: While market cap has fallen from 75 lakh crore to 43 lakh
crore, on a net-net basis, including foreign investors, there is net buying. If you take
cash, futures buying of FIIs, plus buying of all domestic mutual funds and insurance
companies, on a net net institutional basis you have a positive number. So fear factor
is playing a bigger role in declining stock prices than the real, fundamental concerns.
If there was a real long-term problem in the India story, then the $250 billion of for-
eign money and local domestic money put together would have gone - this money has
not gone.
Sanjiv Shah: One more point on the international flows coming in. One issue we
From the overall econo-
my point of view, in the
last few years, we were
talking of fiscal deficit
coming down, now we have
fiscal deficit going up to 6%...
In the 1990s...for every rupee
invested, there was Rs 2 to Rs
3 debt. Today, the balance
sheet of Indian corporates is
much stronger and the valua-
tion lot cheaper than in many
A Balasubramanian,
international markets.
CIO, Birla Sunlife Mutual Fund
Mumbai, Tuesday, July 22, 2008
27...
The market went up by
42%, 46% and 47% in
2005, 2006 and 2007,
respectively. From the
peak we have fallen 40%. If
you look at history we have
fallen from top a number of
times and bounced back
from there over a period of
time. In the past, when the
market has fallen so much in
1992 and 2000, it rallied 100%
Sanjay Sinha,
plus from bottom in 2 years. CIO, SBI Mutual Fund
should be sanguine about is that flows will continue to come in. The worry is that
leverage will come down dramatically for most of the companies. The international
banks will have a big problem offering leverage to hedge funds. Debt markets are in
a roil. So if you look at it for the next 2-3 years, the flows internationally may not come
in as much as we have seen in the past because those markets have clamped up.
Sandip Sabharwal: I wouldn’t agree with that because there has been a redistri-
bution of wealth which has happened. Today countries China, Middle East, Russia
have a huge amount of money which they want to invest and increase their returns,
but what has been happening is they made a few investments in the western coun-
tries in the end of last year on which they are sitting on huge losses today. So they
have also lost confidence for a short term. But as soon as stability returns, there is a
huge amount of capital flows coming into most emerging markets from other emerg-
ing markets, which have much more money.
Madhusudan Kela: This year due to oil itself there will be $2.5 trillion of surplus
for the oil producers, which is two and a half times India’s GDP and or the total sav-
ings of oil countries in the last 25 years. It’s a very huge number. This money will
have to get into various asset classes. First up what they did was invest in Citibank
and lost 30%. This is not your risk money, these are sovereign funds and they can’t
digest 25%-30% losses. As soon as there is stability, this money returns to various as-
set classes. The question is, does this money go back to the US and UK with their iden-
tified problems or does this money come to countries like India and China, where at
least you can see on a 5-year basis 14%-15% notional growth?
Sanjiv Shah: The problem which will arise is if tomorrow China starts to mov-
ing money from US to India, the dollar will go down, logically, because money is mov-
ing out. China’s economy will actually go under. Historian Neil Ferguson says that
China has no choice but to keep buying US debt, because at the end of the day what
will happen is, if the dollar goes down the Americans can’t buy…
Madhusudan Kela: Sanjiv, my friend, I am talking of 1% of this money coming
to market, and the Sensex will be 21,000 again (laughs).
Sanjiv Shah: That’s ok..
Madhusudan Kela: We are not talking of the entire money shifting. I am just say-
ing 1% liquidity flow...
Sanjiv Shah: Sure, that’s for India. But the biggest problem for countries like Chi-
na which have large reserves to move from the US..
One issue we should be
sanguine about is that
flows will continue to
come in. The worry is
that leverage will come down
dramatically for most of the
companies. The international
banks will have a big problem
offering leverage to hedge
funds...So if you look at it for
the next 2-3 years, the flows
may not come in as much as Sanjiv Shah,
we have seen in the past. Executive Director,
Benchmark Mutual Fund
Sandip Sabharwal: I would say that is a simplistic way of looking at what people
will do. Eventually, I think China’s not that fickle a economy that people think if US
exports collapse that economy will go under. It’s a very, very strong economy. Ulti-
mately they will want more returns on the money they are earning. Similarly in the
Middle East, a country like UAE is earning $300 million a day. So where is that mon-
ey going to go? To a country that grows at maybe 1% or 2% or may not grow at all in
the next 10-15 years? Or will it go to other economies where they will see not only a
currency return, but also an asset return?
Sanjiv Shah: Right, but let me take Madhu’s point. I agree with you, you know a
little bit of money comes in - I think they have approximately $2 trillion of reserves
—- and we go up to Sensex 21000. What are the returns then? Do we get the same
amount of returns at 21000 index? I don’t know. So it’s very difficult for global central
banks to move away from the dollar yet. I am not saying it won’t happen over the next
10-15-20 years, but I am not so sure.
Madhusudan Kela: But we are only talking of marginal shift..
Sanjiv Shah: We are not talking about India markets…
Madhusudan Kela: We are talking only of India.
Balasubramanian: 1% $2 trillion will be $20 billion..more than what we got the
whole of last year
Madhusudan Kela: One more factor which has gone completely unnoticed is the
rupee versus yuan equation. The Chinese currency has risen by 11%, ours is down
by 7%. So what happens to our $160 billion of exports? Most Chinese companies op-
erate at 6-12% Ebidta. On that you add 11% yuan appreciation. Now what does that
do to the longer term prospects of Chinese exports compared with ours? Our Ebidta
margins are 30-40% while the best Chinese firms make 17% Ebidta. China is pro-
ducing 500 million tonnes of steel against our 15 million tonnes. What stops India
from building 30 million tonnes capacity and exporting? The world is importing iron
ore from India and exporting steel. Now you have 15% duty on ore, which indirectly
makes Indian steel much cheaper. These things will take much more time to pan out…
Sanjay Sinha: Today it’s a function of risk assessment: The risk appetite has con-
tracted so money has tapered. But given India is a structurally an attractive destina-
tion, FII money will come. Look at the FII figures - is it net negative every day? No.
There are net positive days too. But the counterpoint is, we are underestimating the
power of the domestic flows. Look at the gross number: Our savings rate is 32-33%
(at $330 billion). Half of that goes into physical assets and 50% to financial assets. So
we are talking about $150 billion of financial assets that are incremental every year.
Out of that, if just 10-20% comes into equity, you are talking about $30 billion domestic
inflows possible every year, which is far more significant in terms of absorbing the
selling that comes from foreign funds.
Mihir Vora: I agree with Sanjay. But what we must understand is that the Delta
that the FII buying or selling is going to have is going to diminish for sure. Five years
back we were a half-trillion economy with 22% savings rate so let’s say that’s $110 bil-
lion savings. Now we are a trillion dollar economy with 33% savings. So in five years
we have gone from $110 billion to $330 billion savings, per year. Compared with that
FII flows are really a minuscule percentage of savings. I would not ascribe the cur-
rent fall to just FII selling. I think FIIs are going to be incrementally less and less
meaningful in terms of their sizes because of the power of local savings. Ultimately
what would matter is the changes in sentiment and changes in fundamentals.
Sandip Sabharwal: I think we can’t focus too much on flows because incremen-
tally in years you will see years in which there will be $20 billion of buying and mar-
ket goes up very little, while in another where you’ll have $5 billion of inflows and
the market flies. So sentiment also comes into play. It’s unproven if flows lead to a fall
or rise or markets rise and flows happen.
Mihir Vora: Absolutely, it’s debatable. Absolutely.
Sandip Sabharwal: If things become better, if sentiments improve, even without
flows, you will still see the markets improving..
What are the indicators of improved sentiment? What should the retail investor look for
under the circumstances?
What investors should clearly focus on is that incrementally the growth of Indian