‘India is a long way from the market bottom’

HSBC pan-Asia equity strategist Garry Evans says a market rally isn’t likely until after the next elections. Excerpts from an interaction with DNA Money’s Venkatesan Vembu in Hong Kong on Wednesday:

Has the sharp market correction in Indian equities made valuations attractive?
I don’t think Indian equities are still cheap. Sure, the market’s price-to-earnings ratio is now 13.5 or 14, down from a peak of 21x. But the problem with the price-earnings is that the earnings look unrealistically high, and in India, it looks particularly optimistic. If earnings forecasts get cut by another 10-20%, the P/E would go up to 14.5x.
What I would instead tend to rely  on is price-to-book. The India market is
still trading at a P/B of 3.2. Typically, in a bear market, the Indian market has bottomed at about 2 times P/B. We’re still a long way above that.

How do you see Indian banks, which are available at slightly less than book value?
I haven’t looked specifically at the banking sector, but then banking sectors typically quote at low P/B because there’s the risk from non-performing loans. Typically, in an environment where you’ve got falling loan growth, falling growth rates, interest rates going up and increasing NPA risk, it’s not a good environment for the financial sector. So, I wouldn’t be brave at the moment and buy Indian banks.

Does the new political realignment bode well for the reform process? Is that a buy signal?
In the short term, it may well be. We had a little bit of a rally after the confidence vote was won, although we’ve already lost a bit of that. Some of the simple reform measures that were held back previously could well be brought back, so that’s a little bit of a positive. But we still have an election hanging over us. If we to assume the Congress will not win the election, what emerges is crucial: If it’s the BJP, it’s fine but if it’s a coalition involving the Left parties or Mayawati, it would be worrying for the markets.

What are the cues that would drive you back to the market?
Four things: First, when we can  say that inflation has peaked; second,  when valuations are down to previous  trough levels; third, when interest rates have probably done their job, and I think there’s another 50 bps to go; and fourth and most  important, the elections. I think we can’t really expect a proper rally in the market until the elections.

HSBC’s senior Asia economist Frederic Neumann believes the country seems fairly immune to a global slowdown. Excerpts:

What do the RBI’s moves on Tuesday do to the fight against inflation?
What’s important is that the central bank has sent a strong message that it’s on top of the fight against inflation. Among the regional central banks, the RBI appears relatively aggressive; others haven’t moved quite as vigorously.  The Indian economy is sensitive to interest rate changes. We expect the economy to slow over the next 12 to 24 months, which will address inflationary pressures. I think it’s quite a significant move.

Are you scaling back growth projections?
For 2009-10, we expect 7.5% growth, marginally down from 7.8% this fiscal.

Is India’s macroeconomic policy management seriously flawed? S&P’s recently flagged the risk of a downgrade of India’s sovereign rating...
I wouldn’t characterise it as completely out of control. I think India has a very large budget deficit, and that’s always been the Achilles’ Heel of its economy. One concern that we share with other financial analysts is that in an election year, there’s always pressure on the government to spend more...

What’s your outlook on the Indian rupee?
India runs a current account deficit and that’s had some people speculating that the rupee is perhaps overvalued. We don’t necessarily think that’s the case... We don’t necessarily foresee any rapid weakness in the rupee. If anything — and this is to the benefit of India and perhaps the rupee over the next years — India seems to be fairly immune in the face of a global slowdown. It’s got the least growth correlation to any of the large economies. It’s not export-dependent, and its exports don’t go necessarily to the US and the EU. The margins they do aren’t really big enough to push the Indian economy into recession, and this should benefit the currency over the medium term.

Given India’s immunity to a global slowdown, what underlies the turnaround in its growth prospects?
India’s problems are largely home-made. The Indian economy is slowing down not because of the global slowdown; it’s in part home-made. The idea that India’s economy is not sensitive to global developments still holds true, but it doesn’t mean it doesn’t have its own cycles — driven by home-madae inflation, lack of investment and lack of reforms.
venky@dnaindia.net