Now for the Indian turnaround story

SINGAPORE - Indian stocks have just suffered their first quarter of contraction in more than five quarters as the charm of the Indian growth story fades.

Slow growth, the scourge of inflation, rising fiscal deficit and fears of political uncertainty in the world's largest democracy ahead of an election are the key culprits.

Bombay Stock Exchange's benchmark 30-share Sensex lost 3 per cent in the first quarter of this year, making it one of the worst performers among its Asian peers.

So, one could be forgiven for thinking Mr Sanjiv Duggal, HSBC Global Asset Management investment director for India Equities, needs a reality check, given his highly bullish outlook on Indian stocks.

But only until he explains his contrarian stand. "It's good to come in when there's a lot of bad news in the market. That's when you want to buy stocks rather than looking at US stocks that have hit new highs."

He has been managing the HSBC GIF Indian Equity Fund with a fund size of US$3.9 billion (S$4.8 billion) for 17 years.

He believes the Indian economy has bottomed out. "We are not just buying hope. Things have actually improved but the market is not pricing them in."

A cheaper Indian rupee, attractive market valuations, rigorous government reforms and an economy that is turning the corner from cyclical lows are driving Mr Duggal's optimism.

He has put his money where his mouth is.

"I have personally invested in Indian equities since 1998 when my daughter was born. I haven't sold as I take a long-term view," he says.

For the average investor though, he recommends a three-year investment horizon to tap the budding Indian turnaround story.

"In 2007, the market overbelieved in the Indian story and paid more than what they should have. Now, they disbelieve and it's an opportunity," he adds.

Q: Why are you bullish when Indian equities have fared so poorly?

We are more positive now because the Indian government has delivered a fair amount in reforms. It's not all talk but delivery. But people still don't believe in the government. So there's this huge disbelief gap.

Q: Is that because the market thinks the government lacks sure-footedness in pushing forth the reforms?

The worry is that the government may fall in the upcoming elections some time next year.

The government has made tough decisions in one shot with no roll-back - raising the prices of diesel, railway fares and so forth.

There are good stocks of companies that are beneficiaries of this, like big oil and gas stocks which have been bearing part of the subsidies.

Their earnings could rise at least 50 per cent over the next couple of years. Yet, share prices haven't moved. Big stocks in this sector are trading at single-digit earnings multiples, have very high return on equity - over 20 per cent - and dividend yields.

Q: Political uncertainty, given the looming elections, is a major dampener. Do you think it's a risk?

India has had coalition governments which have lasted full-term. The government wants to continue with its reforms. The intent is very serious.

The Indian government is also actively trying to unblock stalled projects and draw more fresh projects. Since January, a Cabinet committee on investments have cleared some US$14 billion (S$17.36 billion) worth of fresh projects.

These are very important in making our call on Indian stocks.

Q: Do you think the Indian economy is out of the woods?

The economy has bottomed. This could be the low point and things should improve.

For the fiscal year that has just begun, we are looking at GDP growth of 6 per cent, and next year, expect it to hit 7 per cent.

For the year just finished, it'll be around 5-5.5 per cent.

A key catalyst is a pick-up in investment cycle and this has begun.

Q: But India's widening current account deficit is a major worry, isn't it?

The past quarter (ended December) was particularly bad but we are already seeing better trade numbers come through in February.

Gold imports have fallen and crude oil prices have softened, which signal things are improving.

The Indian rupee has been weak as a result, but given the global shocks, it has been remarkably steady.

We are not here to get the bottom or top of the stock market, but the risk rewards are really favourable now.

We expect corporate earnings growth this reporting season month to come in at 10 per cent and around 15-16 per cent going forward.

That's fine, given that the economic growth has come off from 7-8 per cent to 5 per cent.

Q: What are your favourite sectors?

We are overweight on oil and gas, pharmaceuticals, energy and materials. We like profitable firms with the right valuation.

We are playing the turn in the economy as well as the revival of projects as these sectors will benefit.

The cyclical stocks are attractive as they are at the lowest point and are very cheap and are poised to recover as the economy picks up. The defensive stocks like consumer staples where investors have flocked to are most expensive.

The valuation gap between these two categories of stocks is the widest it has ever been.

anitag@sph.com.sg

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