People have been investing in euro, yen, pound, dollar, but in 20 years the Indian rupee could emerge as one of the currencies in which central banks park their reserves, feels Nishid Shah, president & CIO, IDFC Investment Advisors . In an interview with Apurv Gupta, Shah who manages assets worth about $1 billion says the industry should be prepared for some amount of resources mobilisation measures by the government. Excerpts:
What has caused this sudden rush to buy stocks?
There was a lot of pessimism built in the stock prices. Business fundamentals have not deteriorated to the extent stock prices collapsed in many sectors. For instance, prices of stocks in construction and real estate sectors fell to a level where it was thought companies would wind up their businesses. Even though several companies continue to grow at 20%-30% a year, but were trading at 4-6 times their price to earning (P/E) ratio. In March 2009 we saw 15%-20% growth in dividend payout. People are realising that the whole world is not crumbling and stock prices had corrected excessively. However, stock prices have now bounced back to realistic levels for many companies.
Where do you see the value now? Are these valuation gaps still available?
Despite sharp rise in the prices of most of the companies, there is still value left in selected midcap stocks even now. Companies with good future potential are still available at single digit P/E multiples. Some of these companies with billion-dollar turnover and order book of $2-3 billion are quoting at market cap of $400-500 million. This aberration cannot continue for a long time and the valuation gaps will be filled. Part of that has already happened and that is why we saw this spring effect.
Was it largely due to the impact of the election outcome?
Election results acted as a catalyst to this rise. The verdict gave investors confidence that the $1.2 trillion Indian economy will continue to witness a robust growth with the presence of a stable government. Assuming a GDP growth of 11% (nominal), it can be a $2 trillion economy over the next five years. That is more or less the size of economy of UK, Germany, France and Russia.
What kind of investments do offshore funds prefer right now?
Investors are interested in long-term investments, mainly in infrastructure and related sectors. Even though there has been substantial rise in the stock prices, institutional investors are still keen on investing in the power and real estate sectors. Everybody wants to buy on the decline. We saw large QIPs getting subscribed even though market had written off those companies. This is an indication of the amount of money waiting to come in. Liquidity infusion by the US Fed and the European Central Bank will find its way into capital market and commodities.
How does India compare with China in the emerging market space?
Democracy and independent judicial systems are clear plus points for India when compared to China. India is a relatively more open economy. India will be a preferred investment destination. Over a period of time, significance of the US dollar and the euro will come down and Asian currencies such as the Indian rupee and Chinese renminbi will gain strength.
Can the Indian rupee become the part of world’s reserve currency?
Indian rupee can certainly be a part of the basket of currencies in which central banks would park their reserves. People put money in euro, yen, pound, dollar. But the US and Europe would be ageing. The world economy growth would be driven by India and China. We can be part of some allocation in the reserve currency and that will lead to huge inflows. However for that to happen, we need to have a full capital convertibility, fiscal discipline and a more open economy.
Do you think the market is over-optimistic on the budget?
I would like to play down the budget expectation as the fiscal situation is bad and the government will have to raise resources. I don’t expect too many of sops. There will be sops for common man but the industry has to prepare for some amount of resources mobilisation measures by the government. We can certainly expect a thrust on infrastructure building in the areas of power generation and transmission, roads, ports and airports. Markets are generally always optimistic about budgets. The FIIs are under-invested in India, and we will see interesting times ahead.
What has caused this sudden rush to buy stocks?
There was a lot of pessimism built in the stock prices. Business fundamentals have not deteriorated to the extent stock prices collapsed in many sectors. For instance, prices of stocks in construction and real estate sectors fell to a level where it was thought companies would wind up their businesses. Even though several companies continue to grow at 20%-30% a year, but were trading at 4-6 times their price to earning (P/E) ratio. In March 2009 we saw 15%-20% growth in dividend payout. People are realising that the whole world is not crumbling and stock prices had corrected excessively. However, stock prices have now bounced back to realistic levels for many companies.
Where do you see the value now? Are these valuation gaps still available?
Despite sharp rise in the prices of most of the companies, there is still value left in selected midcap stocks even now. Companies with good future potential are still available at single digit P/E multiples. Some of these companies with billion-dollar turnover and order book of $2-3 billion are quoting at market cap of $400-500 million. This aberration cannot continue for a long time and the valuation gaps will be filled. Part of that has already happened and that is why we saw this spring effect.
Was it largely due to the impact of the election outcome?
Election results acted as a catalyst to this rise. The verdict gave investors confidence that the $1.2 trillion Indian economy will continue to witness a robust growth with the presence of a stable government. Assuming a GDP growth of 11% (nominal), it can be a $2 trillion economy over the next five years. That is more or less the size of economy of UK, Germany, France and Russia.
What kind of investments do offshore funds prefer right now?
Investors are interested in long-term investments, mainly in infrastructure and related sectors. Even though there has been substantial rise in the stock prices, institutional investors are still keen on investing in the power and real estate sectors. Everybody wants to buy on the decline. We saw large QIPs getting subscribed even though market had written off those companies. This is an indication of the amount of money waiting to come in. Liquidity infusion by the US Fed and the European Central Bank will find its way into capital market and commodities.
How does India compare with China in the emerging market space?
Democracy and independent judicial systems are clear plus points for India when compared to China. India is a relatively more open economy. India will be a preferred investment destination. Over a period of time, significance of the US dollar and the euro will come down and Asian currencies such as the Indian rupee and Chinese renminbi will gain strength.
Can the Indian rupee become the part of world’s reserve currency?
Indian rupee can certainly be a part of the basket of currencies in which central banks would park their reserves. People put money in euro, yen, pound, dollar. But the US and Europe would be ageing. The world economy growth would be driven by India and China. We can be part of some allocation in the reserve currency and that will lead to huge inflows. However for that to happen, we need to have a full capital convertibility, fiscal discipline and a more open economy.
Do you think the market is over-optimistic on the budget?
I would like to play down the budget expectation as the fiscal situation is bad and the government will have to raise resources. I don’t expect too many of sops. There will be sops for common man but the industry has to prepare for some amount of resources mobilisation measures by the government. We can certainly expect a thrust on infrastructure building in the areas of power generation and transmission, roads, ports and airports. Markets are generally always optimistic about budgets. The FIIs are under-invested in India, and we will see interesting times ahead.
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