As India celebrates Diwali, we took the opportunity to talk to Tim Dickson, fund manager on the Asia Equities desk at Invesco Perpetual, about his economic outlook for the country and its emerging market counterparts, investing opportunities in India, and the tradition of reading the 45-minute Muhurat trading session that takes place on the National Stock Exchange of India on Diwali as an omen for the rest of the year.
Cook: India today celebrates Diwali – a national holiday in the UK would usually mean the London Stock Exchange would be closed for the day, but that’s not the case in India. Can you explain what happens in India and what is traditionally seen on the India market?
Dickson: Yes, so the traditional thing is to open up the market for an hour in the evening—for 45 minutes to be precise—and it’s seen as a sign of luck for the year ahead. So the idea is that if the market rises in this time, it’s a good sign for the future. Obviously volumes are very low but what tends to happen is people put in orders to buy shares for family members as a gift, so instead of buying gold or something they buy them a few shares, and if the market’s up that’s meant to be a good omen and is supposed to signify there are many more good trading sessions to come. It’s a bit like Groundhog Day: if the hog shows its face then it’s good news.
Historically it appears that the market does tend to go up a few points on Diwali as I guess no one wants to spoil the good luck charm. Though you’re only talking a few points—much less than a tenth of a percent.
Cook: Given that Mumbai's Sensex hit an all-time high yesterday with a 2% rise, it might be a little harder than in previous years for the market to add extra points today. Presumably yesterday’s session was partly festive spirit but there was also a major IPO, wasn’t there?
Dickson: Yes. A few things were driving up India yesterday—all positives. First of all we had the QE2 from the US which drove markets up across Asia because the amount announced was as much, if not potentially slightly more, than people had hoped. So that helped. And then there was a lot of excitement around Coal India, a government-owned company that was listing a 10% stake. I think it’s the largest coal company in the world by reserves—it’s a big, big company. So there was a lot of excitement around that, it closed up around 40%. So I’d say there were more important factors than just Diwali—it was really going up with the rest of the world.
Cook: The region as a whole has been particularly strong for a while now; investors are certainly broadly optimistic about emerging markets at present. How do the opportunities in India compare with those in other emerging markets?
Dickson: I think there are a couple of things that are attractive about India and that have been attracting money to India. The first thing is the growth trajectory has really picked up. People used to think of India as being in the 5%-6% growth trend, whereas China—obviously people were thinking more in the region of 8%-10%. But what we’ve seen over the past few years is India picking up a gear, partly because investment has picked up and partly thanks to the reforms that were made back in the ‘90s. The result of that is the economy has picked up to a new trajectory of perhaps 7% or 8% and I think that change has generated a lot of excitement.
The second issue is that if you look at longer-term interest rates in India, they’ve come down, and obviously as interest rates fall that tends to encourage investment as well. So it’s become a very interesting place to grow.
A final point is that the Indian economy is much more domestically driven than a lot of the other economies in Asia; exports represent around 15% of GDP, whereas in other Asian countries it’s much higher, particularly in SE Asia where it can be 60% or 70% of GDP. So in an environment where people are a bit concerned about global growth—and our view is very much that growth in the developed world is set to be quite slow—India is relatively insulated.
Cook: Would it be fair to say that investing in India could actually provide an opportunity to hedge against that growth slowdown that we’re seeing in the more developed markets?
Dickson: To some extent, definitely. The one caveat to that is India is one of the few markets in Asia that’s running a current account deficit, so actually it’s dependent on capital inflows to support the currency and for investment to flow into the country. So if you get a shock, if you get a euro break up, or you get a big bank failure again—and none of these things can be ruled out for sure—then those capital flows stop quickly and I think India would actually suffer quite a lot.
Certainly in 2008, during the crisis, the Indian market sold off as much as any other market, so the economy’s definitely a bit more protected because of that lack of trade but from an investment perspective it is sort of exposed because of its reliance on capital flows.
Cook: Would you describe India as a higher-risk investment destination in terms of volatility and political risk?
Dickson: Certainly relative to developed markets. Politics isn’t a terrible issue—the worst thing about politics is that not a lot gets done and it can get bogged down in a quagmire of bureaucracy. In terms of stability, it’s not a big issue. The concern is really that the economy continues to have a lot of inefficiencies in it, corruption is still a problem, you still get corporate fraud, all those sorts of factors, which you have in common in a lot of emerging markets, mean it does remain a risky place to invest.
Cook: What’s your general outlook for the Indian economy and Indian equities over the next few years?
Dickson: We’ve had quite high inflation in India. It is beginning to moderate now, they’ve had a good monsoon and oil prices aren’t going up as much as they were, both of which are quite important factors for India—food and oil, it’s a big importer of oil. Because those are levelling off, inflation is beginning to come back down, having previously raised concerns by getting above 10% measured by the WPI. In the short term, my concern is that the RBI [India’s central bank], which has been putting interest rates up quite steadily, probably still has to do a bit more tightening. That would be okay but the problem is that India is now the most expensive market in Asia, trading on around 18 times earnings. My concern is that, given that headwind of higher interest rates and those high valuations, in the shorter term I actually don’t think India will perform that well. I should say that I’ve thought that for quite a while and it’s continued to perform quite well, so the problem is picking the timing.
But looking out further, into the medium term, longer term—so talking a year, 2 years, 3 years—I’m positive as I think there’s been some really noticeable improvements. I’ve been travelling to India for 12 years now and my last trip there, which was about a year ago, was the first time that I’ve noticed new infrastructure—a new airport, a new bridge in Mumbai, more roads—and all that is very positive and suggests that things are moving forward. I’m definitely in the camp that says the sustainable growth rate has lifted. And against that backdrop I think the outlook is very positive.
Cook: And how does that compare to your outlook for other Asian regions?
Dickson: Well overall, in the shorter term, we’re reasonably positive; we’re continuing to see quite strong flows. So in the shorter term I’m probably more positive on other areas in Asia, most notably China, than I am on India. In the longer term I think India probably looks like a very good place to invest because we are getting this shift in growth, whereas somewhere like China it’s probably the opposite. I think we’ll see China actually slowing from the old growth rates of 8%-10% to more like 6%-8%, so the momentum is definitely with India.
Cook: Are there any areas of particular opportunity that you see within Indian equities?
Dickson: Anything with a domestic bias. I do think things like the coal sector, the energy sector where growth is almost guaranteed because they’re going to need a lot more power and they’re going to need a lot more fuel to feed that. I think other sectors that are probably worth a look are probably infrastructure, the sector that’s building roads and building power equipment, and the financial system. Credit to GDP in India has been increasing quite sharply, but it’s still only about 60% of GDP, whereas in the UK it’s several times GDP. And that suggests to me that there’s still a lot of capacity for credit to improve and credit to grow, probably 15%-20% a year, and that should be a powerful driver for the financial sector. So the financial sector, power, energy—those sorts of sectors I think will do quite well.
Cook: To sum up, is it fair to say that the short term outlook for Indian equities is perhaps a slight cooling off but on a medium-term or long-term perspective you see better opportunity?
Dickson: That is most definitely my view. As I say, I’ve felt that for a while and India’s continued to do quite well. But I just feel that the valuations are now factoring in several years growth effectively and in a way they almost need to stop a bit and let the earnings catch up. That would be my short term view. But longer term, I think the growth is there and what we find when we go and visit Indian companies is that we’re able to find really high quality management who are very good at running the businesses. We can find good companies, it’s just a question of what you have to pay at the moment to buy them.
Cook: Thanks Tim, for your time and for giving us an interesting insight into India investing this Diwali.
Dickson: My pleasure.
