Below is the transcript of the interview
Q: How important is this Budget? Will your investments be or will your investors look very keenly at this Budget as something that can deliver something seminal?
Jacobsen: Budget is always a very interesting thing to watch because it really spells out some of the priorities of the government over the near term. It is probably not as significant as it has been in the past because what we are really looking for is more legislative reforms which aren’t necessarily reflected in the Budget but the event is certainly something that we do pay very close attention to because it shows what the governments priorities are especially over the near term which is always important for investors.
Q: Lately the polemics surrounding the Budget are centering around fiscal deficit itself. The given timetable for the government is to stick to 4.1 percent in the current year and get 3.6 percent of the GDP in terms of fiscal deficit for the next year. Is that a very important target for you? Would you be deeply disappointed if the government didn’t adhere to 3.6 percent next year?
Jacobsen: I personally would not be all that upset if they did not adhere to the 3.6 percent target. I know that the fiscal rectitude is certainly an important thing over the longer term but it really depends upon what are they spending the money on. It is okay to run a deficit provided that it is something that is going to pay off over the longer term.
What is really a big problem is when obviously you have too big a deficit relative to the overall economy and when the deficit is being driven by a lot of social spending that doesn’t really seem to have a big pay off in the future. So, as long as they show a real focus on trying to make longer term investments, missing that target a little bit I don’t think is going to really be all that disappointing.
Q: What would qualify as a good Budget for you?
Jacobsen: The ideal Budget would be one in which they hit the deficit target of around 3.6 percent and where it shows a real emphasis on trying to improve the infrastructure of India, one in which it not only improves the infrastructure but also brings a lot of the various factions and coalitions in the government together. So, if we can get a lot of support behind the Budget without a lot of handwringing and perhaps politicking, I think that is really what I would be looking for.
Q: Let me get to the global scenario in which India finds itself. Last year India got a decent USD 16 billion in terms of investments, not the highest that we have got but decent. Do you think India will see that kind of fund flows this year as well?
Jacobsen: I am anticipating that we are probably going to see a repeat of those types of flows because India is becoming a more popular destination for international investors and for businesses to invest in as well. I think that under the Modi government, with the BJP one of the things that they really want to do was put out effectively a big banner saying we are open for business, one in which they want to have more business friendly policies towards foreign investors and that could bring a lot of foreign investment into India. So, I am anticipating that that trend will continue.
Q: You have been a veteran watcher of Indian companies and Indian markets. How did Q3 earnings look to you? They disappointed several people in the street, inspite of it you are still interested?
Jacobsen: Despite the disappointment it wasn’t a huge miss across the board. You really do look at it sort of quarter by quarter but over the longer term if you are looking out over more like 18 months to perhaps 3 years which is what I typically do when I think about it more thematically, I do not really see a lot of overwhelming weakness in the earnings numbers. So, I am really not that disappointed. It was a short term disappointment but it wasn’t enough to really change the underlying thesis for investing in Indian companies.
Q: How would India compare with rival emerging markets, indeed with rival investment destinations today where would it be in your pecking order?
Jacobsen: When it comes to emerging markets it is such a broad umbrella of countries within there. You have some emerging markets that might be more submerging markets. One of the big unknowns is what is going to happen throughout most of South America which is one of the reasons why I have been suggesting that people should perhaps underweight that and overweight emerging Asia and emerging Europe. Within the pecking order of my favourite long term investments I would say that India is probably near the top. It is not at the top right now only because I think that in emerging Europe there are a lot of really good bargains to be had over there. So, I think that India last year was my number one pick, this year it is in my top 5 but perhaps not the number one but only because I think things have gotten a lot cheaper in emerging Europe.
Q: What kind of sectors interest you in India?
Jacobsen: Right now I am really interested in the infrastructure play in India because clearly there are a lot of developments that need to take place. I think that you have such a wide amount of inequality across the country that we really need to integrate the economy and one of the way in which you can integrate the economy is through various pieces of infrastructure, whether it is through better sewage system, better roadways, better telecommunications, so I think my favourite right now is looking more at infrastructure broadly speaking. However that can be in a number of different industries, that could be in the utility sector, which could be in the telecom sector. It could also be in the industrial sector. So, outside of the infrastructure play I do like the idea of investing more in the information technology space. I think that Indian companies historically have proven themselves to be very good global competitors in the information technology space and I really don’t see them losing much ground to a lot of their non-Indian competitors.
Q: Well, the other theme that of course investors watch out in India is what the Central Bank is doing and where the interest rate cycle is headed. What is your own guess about the interest rate cycle, are you expecting a series of rate cuts?
Jacobsen: I am expecting a series of rate cuts. Now, whether or not those rate cuts actually materialise, I do not think that it necessarily matters for longer term investors because I do not think interest rates are necessarily too high that it is actually stifling growth but the thing is the Central Bank in India actually does have some wiggle room or some flexibility to lower rates because inflationary pressure have abated and recently they have begun to cut rates a little bit signalling that they intend to try to stalk growth and that is going to be a very important thing is that they are in a very god position where they can cut rates because there isn’t that inflationary pressure and the cutting of rates can actually help stimulate some growth.
Now, when it comes to actually comparing the rates in India versus say in the Unites States, this is something that is very important where when the United States Central Bank begins to actually normalise policy or begin raising rates, there are concerns about whether or not that is going to adversely effect emerging markets especially India.
So, that is why right now the Central Bank in India is in a very good position to try to manage that transition.
Q: I will come to you with some more global questions but just to pursue this interest rate cycle and the things that it generates a bit more, would you invest in financials in a big way, would you invest in government owned banks or would you prefer private banks?
Jacobsen: My preference is actually-when looking at the development of the financial sector in India, it does present some very good opportunities. Rates when they are being lowered, the purpose of it is not to stifle growth or it is not because they are actually trying to harm the financial sector. Lower rates are going to be beneficial to the financial sector. The Big question is which financial institutions will benefit most from this.
There is a broad canopy of businesses of banks that you can look at, however it might actually be better to be looking more at the consumer side as opposed to looking at financials.
Yes, the banks can probably profit from this and do well but maybe more of the consumer oriented businesses are going to benefit because it is the consumers ultimately that are going to have lower debt servicing burdens. So, that is probably the way that I would play it more now.