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Indian mkt in top gear, but looks expensive: Credit Suisse

India has been the best performer so far and forecasters are upgrading the country’s GDP estimates, said Robert Parker of Credit Suisse Asset Management.

Bulls rampaged Dalal Street as market closed at record high boosted by some heavyweights. The Sensex ended up 522.66 points or 1.8 percent at 28784.67. The Nifty shut at 8695.60, up 144.90 points or 1.7 percent on back of benign local as well as global cues.

In an interview to CNBC-TV18, Parker said he expects India to benefit from the macro environment.

Below is the transcript of Robert Parker’s interview with CNBC-TV18’s Sonia Shenoy, Anuj Singhal and Senthil Chengalvarayan.

Sonia: What have you made of the big run up that we have seen in India? It has been relentless, would you continue to be bullish on the Indian market ahead of big events like the Budget?

A: If we compare the Indian markets so far this year we are up, as you will know, just over four percent. So, that makes India one of the better performing markets worldwide. And that contrasts, for example, with the Shanghai Composite which although had a very good day today the Shanghai Composite is down year-to-date (YTD) by about two percent. So, India really is up there with some of the top performing markets like Germany up five percent YTD and has obviously significantly outperformed the US market and the Japanese market, now a number of factors.

The first factor is that the global environment although has been very volatile with the ECB doing quantitative easing (QE) this Thursday in two days time I would argue the global environment is turning less negative. I also think linked into that the oil prices are starting to form a base around current levels. So, the investor confusion about the outlook for the oil price is now decreasing but most notably in the case of India.

India clearly is one of the major beneficiaries from the decline in oil prices. this is going to be a boost to growth. Investors are much more positive on the growth outlook for India now and generally forecasters are upgrading their outlook for Gross Domestic Product (GDP) growth this year to well above six percent.

Senthil: But is all of that factored in at current levels or is their more to come?

A: There is slightly more to come. I use the word slightly because obviously valuations are now starting to look somewhat stretched in the Indian markets and clearly India is now, if one just looks at price earnings ratios and India is now one of the more expensive markets. Having said that, the growth outlook is positive, the outlook, low inflation is intact with inflation at five percent or less and that means that the Reserve Bank of India (RBI) can cut interest rates further.

So, the macro environment will certainly hold the Indian market, it will gain more but one has to be rather conservative in terms of the outlook for the pace of gain. There are further upside for India but don’t expect this overgains that we have seen in the last couple of weeks.

Sonia: You just spoke about the European Central Bank (ECB) policy and what is expected over there? Can you throw some more colour on what we should go ahead expecting? Do you thin k that ECB will communicate any specific volume within its new package or will it just stress on the effectiveness of QE on the announcement on Thursday?

A: To achieve credibility they will have to announce a volume for QE. The expectation is that, that is going to be somewhat in excess of 500 billion euro. They may announce that as a target, do not forget that their balance sheet is currently 2.2 trillion euro previously Mario Draghi has said that he would like to take that balance sheet over time up to 3 trillion euro. So, the alternative is that they may do what the Fed did which is announce an amount of QE per month. I suspect that they won’t do that. They have an objective of QE over time of 500 billion plus. Obviously what a lot of people are concerned about is to what extent the ECB will be buying bonds or will it be delegated which is more likely to the national central banks like the Central bank of Spain and like the Bundus Bank and that is more likely. And the other aspect obviously is this very next subject which is if there are losses generated through the bond buying, who takes loses and there is very strong opposition from the Germans that the losses be at ECB level and any losses largely be taken by the individual national central banks.

Anuj: Let’s come back to the India question because so far the rally that we have seen in India is essentially a hope rally. We still haven’t seen any data points to support the kind of move that we have seen. Do you get a sense that over the next six months or one year that data will also turn positive for India?

A: Yes I do and the reason why I say that I do think that India along with China but probably more so in the case of India is one of the biggest beneficiaries world wide from an oil price, if one looks at Brent of less than USD 50 per barrel. That is good for energy consuming sectors in India. It is good for the consumer sector in India and politically if one look at one of the problems which we have discussed in the past, the Indian economy has been in 2013 and most of 2014, an unacceptably high level of inflation and that is why quite rightly RBI has been focusing on reducing that level of inflation. Now the RBI must be quite pleased with the fact that inflation is now down to 5 percent and is likely to stay at that level. That allows the RBI to cut interest rates further and if one looks at 10 year bond deals, we have come down below 8 percent on 10 year Indian government bond deals, by the third quarter of this year, bond deals could be down to worth close to seven percent. That in a way underpins this equity market rally.

Sonia: Emerging markets were the big game in 2014. What is the sense you are getting about 2015. Do you think emerging markets will continue to outperform developed markets or given that growth in the USA is picking up, things could turn?

A: The point to make is that emerging market performance has been very divergent and obviously the scene in 2014 was the very good performance with one or two exceptions like Korea but the big out performance by Asian markets and it was not just India. We obviously last year had this very strong performance from mid year onwards by the Chinese markets continue strong performance by markets such as the Philippines and the Indonesia. So 2014 was very much a year for focussing on Asian markets. If one looked at other emerging markets in 2014, Eastern Europe and Russia struggled, South Africa struggled and Latin America was an area of under performance. Latin America will continue to underperform. If you look at the two big markets, Mexico is very expensive, Brazil, the market is fighting 12 percent plus bond deals. I do not see the Brazilian market picking up. Russia we all now is cheap but yet has ongoing problems. Most notably, Russia is obviously one of the biggest losers from the fall in the oil price. The outlook for Asian markets generally is very good indeed. Some of the markets like Indonesia and the Philippines are looking somewhat stretched at the moment but the Indian and Chinese markets still the outlook is positive.


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