India growth story most attractive

Sify.com: November 18, 2005


According to Citigroup Director Hans Goetti, India is the most attractive growth story for the next five years.

He adds that a shift of domestic funds to equities is crucial for the markets. Buying from domestic investors in India is encouraging, he says.

The near-term fear has been over-extended in India, feels Goetti. He adds that they are bullish on ITC, and banking stocks, among which their top pick is HDFC Bank.

Excerpts from CNBC-TV18's exclusive interview with Goetti:

How have you read the last one-month for emerging markets? Where do you see the entire pack moving from here?

We are quite positive. From a technical perspective, entire

Asia has had a pretty large pullback in October and has now rallied back to an uptrend. So markets could be in a trading range over the next few weeks.

But in the long run we remain bullish on the domestic demand theme in Asia across-the-board and the same applies to India. India fits very nicely into Asia in the sense that, India is the most attractive growth story for the next five years.
What is the tactical view after the pull back? What are you doing in the near term?

In India, as far as the near term goes, the fear is that the market is a bit over extended in terms of valuations. If we measure the markets, we could argue that by 1992 India had 40 times earnings and once the restrictions on foreign investments were lifted in 2000, the country had 30 times earnings, that was the during the IT bubble.

India is at 17 times earnings now, so it is only expensive compared to other Asian markets. Inflation is picking up, but that is across the region and that means the interest rates will go up. That is the tactical side.

However, if one wants to benefit in the near-term, one would have to look at fund flows and the two countries that stand out are Korea, where there is a massive shift of domestic savings to equities; and India, where a similar thing took place during October, when foreigners were selling and domestic funds were buying. So that is a very encouraging sign and hopefully, sign of what will come in future.
What are you expecting for the rest of the financial year? Are you expecting markets to slide back, or maintain the 8500 levels?

I think markets will be in a trading range, without much of an upside or downside for the rest of the year. Markets are relatively well supported by earnings, if we exclude certain sectors.

The valuations in general across Asia are low and I would think in India we have an emerging story about consumers, bank lending and consumer lending. So that is where we will put our money.
What do you like in the consumer space?

ITC is one of the many we like and of course the banking story. It is a banking-led bull market. If one looks at bank lending in terms of GDP, it is relatively low and consumer lending is even lower. It is only 7 per cent of GDP.

So there is room to grow there. If one looks at consumer plays, one would have to look at the banks and our top pick there is HDFC Bank.
What about allocation? This time around, what picture do you expect to see emerge on the allocation front?

We are going into markets which can produce earnings and where one can see a shift in domestic savings into equities. Across the region most of the bull market that we had in 2003 was basically carried by foreign investment.

If we have markets where domestic investors are coming back in, these are very powerful stories.

Korea is a great example. It is up by 39-40 per cent this year and that is not because the economy is doing particularly well, but because the major reason is that domestic investors are shifting their funds into equities. This is based on new products, savings plans involving equities etc. I think this is something that will happen in one country after another over the next few years. So the participation of the domestic investors becomes extremely crucial everywhere.

As far as the interest rates in the US are concerned, the dollar strength is a result of the Fed tightening. We see this cycle going on, Fed will continue to tighten monetary policy. Of course, we have to see what data will be produced.

This means that for the next four months, we will have a stronger dollar and maybe some of the Asian currencies will be pulled with it.

In Asia, from the medium to long-term there will be an appreciation of Asian currencies once the Fed tightens and China revalues the Renminbi again.

If Asian currencies appreciate, then there will be capital inflows into Asia, which will of course, enforce the domestic recovery story and the asset reflation play.