Robert Parker, Chairman, Asset management of Credit Suisse, believes that a minor downward movement of the Indian rupee against the dollar is actually a positive for the Indian equity market. “Investors are unnecessarily worried about volatility. Volatility is a source of profit for them,” he tells Namrata Brar of NDTV. Foreign investors focus on two things. First, is there political stability in the country? Second, is the environment investor friendly? If a country has a political regime that is going slow on privatization, free market reforms and efficient capital reforms, then it will clearly discourage foreign investors. In India, there is no sub-prime problem, there is no banking problem and the bad debt ratios remain very low indeed. So the banking, in Asia and notably in India is actually attractive.
NDTV: What is your reading of the global equity pulse? Is it around 72 or getting too away from that?
Robert Parker: Well, this year has been a very bad year for all equity markets. Very few markets, so far, are in the positive territory this year. Clearly many markets are quite stressed for e.g. China is down 60 per cent. Russian market is down 40 per cent, since May. Some commodities related market which in May and June actually looked very strong, have reversed very sharply. Even the developed market, with Europe having performed very well during L5 and L6 and during the first half of L7, seems to see a major fall this year as, well.
NDTV: The major part of the problem this year is that nothing seems to be working. The commodity related markets like Britain and Russia had a good run for them but even that seems to be collapsing. Do you see this consistent fallout of all asset classes coming off together?
Robert Parker: Well, I think there have been two or three very interesting trends this year. The trend one, is change in commodity cycle and trend two is, what’s been going on in the Foreign Exchange markets. During the first seven months of the year we’ve seen a very strong upward momentum in the commodity market. Then we saw the reversal in all commodity prices, with gold coming down and major moves in food prices.
The dollar, too, during the first seven months was under extreme pressure. At one stage, Euro doubled in a period of six years. The credit conditions have been very erratic but the crunch started in August 2007. Really we haven’t seen any major resolution since then, the credit conditions remain very difficult.
I would argue that the problems of Fannie Mae and Freddie Mac were problems that must have been growing for many, many years and in fact their financial structure needed a repair quite dramatically. Obviously the credit crunch added to the problems and that resulted in the government bailout. In the banking system there are ongoing problems. Recently we had the announcement of the Lehman Brothers going bankrupt. The credit crunch obviously resulted in poor equity markets. The overall trend has been downwards the whole year.
NDTV: Lets talk some more about Fannie and Freddie. You said that the structure was problem. In the first place and the government formed enterprises in the first place. But the situation does not work when a country claims to be capitalist and is being socialist in a sense.
Robert Parker: There was a mixture of objectives there. A profit making organization with a socialist objective, so obviously there was a conflict.
NDTV: So do you think institutions like these won’t survive post this.
Robert Parker: Well I think that the socially sponsored organizations and the government-sponsored organizations need to be very clear in their objectives. In case of Fannie and Freddie the objectives of these organizations have become very confusing. We cannot have organizations with a social responsibility support the housing market and provide mortgages to people who might not otherwise be able to afford them and that is obviously in conflict to the profit-maximisation objective.
NDTV: let us talk about the investors who interact with and advise. They are sitting on a cash strategy that has spelt well for some in the past couple of months. When do you think that is going to change, because as we discussed earlier that the commodity price s are coming down and no one is sure about the direction of currencies so no one wants to back the currencies funds alone, at this stage. Then the global equity markets are having a problem and there are growth slowdown concerns, as well. So there are not many alternatives for investment.
Robert Parker: Well you have asked a key question, as to what will happen to the investor cash. If you look at our models, investor cash levels today are at a record high and investor sentiment is at or close to a record low. The investor cash levels are higher today than they were during the bad markets of 2001-2002. Eventually how will the cash be deployed? In our view, commodity prices notably gold would be under some moderate pressure for the next six-seven months. I see oil prices stabilizing a bit at $100. I see food prices and soft commodity prices probably down a little bit further. Gold, I see because of the strengthening of the dollar and also because of peaking of inflation, also on the further downside. We can have opportunists buying commodities in the second half of 2009 but certainly not over the next six months. The trend of dollar strength that we’ve had for the last two months is set to continue. Considering all the factors that drive the currency markets, that is the probability of Europe cutting down rates, the improvement in the US trade deficits and I think we’ll be surprised by quite a significant improvement over the next two-three months. Various factors like capital inflows will again be a dollar supporter. In terms of bond markets, frankly there can be sideways. We like investment grade shares. Whereas here in India there is quite a bit of an investor appetite for short dated, may be one-two years, corporate shares with reasonably high yields for the moment. In terms of equity markets I think you have to be very defensive in developed markets and G3 markets at least till the second half of 2009.
NDTV: But you are saying that the markets will abate themselves by the second half of 2009.
Robert Parker: We expect, in the second half of 2009, some modest pickup in growth in the United States, Europe and Japan. One very important point here is that the growth in emerging markets is only slightly reversing, for e.g. the Chinese growth rate this year is expected to be 9per cent and Indian growth r ate is expected to be 7-7.5 per cent. So the divergence between the growth rates of the developed economies and the emerging economies is widening. That’s why I feel that investors who fled the emerging markets this year, would probably putting cash back in the emerging markets early next year.
NDTV: Despite the macro concerns, I would talk a little bit about India. The macro concerns excluding a slowdown in GDP are, increasing inflation, currency depreciation and high fiscal deficit. Even if the growth holds on 7-7.5 per cent, which is still the second fastest growing economy in the world, do the macro concerns worry you?
Robert Parker: In case of India, I think we can’t be surprised by the improvement in inflation. If we look at inflation worldwide, German inflation fell; the import price inflation in the US also fell. I’ve also seen a dramatic fall in Chinese inflation over the past two months. The food inflation in China was 25 per cent three months ago and is now down close to 10 per cent. And I know and recognize that there are serious inflation concerns and it is quite justifiable to say that inflation has obviously been very negative for the past year. Now that’s going to peak again, and we’ll see a slow and steady improvement in inflation. The Indian rupee, I feel is under minor pressure and there could be a slight depreciation in rupee against the US dollar. But I suspect that probably the rupee is going to be very stable against all other Asian currencies, and given the importance of the Asian regional trade, that stability is much more important than its movement against the dollar.
NDTV: So institutional flows will not be affected by this depreciation?
Robert Parker: I might think so. Going back to the beginning of this year, I argue that your TV channel aired that the strength of the Indian rupee then was a negative for the economy and a negative for the Indian market. Whereas, I think that stability or a minor downward movement of the Indian rupee against the dollar is actually a positive for the Indian equity market.
NDTV: When you look at the Indian equity market right now, do you see a lot of value here? You said that investors would eventually look at markets like India and China, over the next several months when the macro concerns and the differences between the economies will play out. But if you look at the equity market, as an asset class right now, do you see a lot of value?
Robert Parker: I think you asked me this question at the beginning of the year and the answer is clearly a NO, because at that time we had a very overvalued the Indian market with the PE well above 20. The markets have been very negative for the past nine months and the PE’s have returned to mid-themes that are below 15.
NDTV: But do you think that after 2009, when all the factors driving the markets are properly set in place, the volatility of the Indian asset class markets will come down, since investing in emerging markets like India or any other emerging markets is a serious concern. There is high volatility; uncertainties of earnings and the political –economic factors in such markets.
Robert Parker: Well I think that investors are unnecessary worried about volatility. Volatility is a source of profit for investors, so I wouldn’t worry about volatility. I do, however, think that if we form a pace in the equity market by Q1 next year, we could be some decline in volatility. In the short term, while the world markets are still buffeted by the concerns of the global crunch and more recently the concerns of some industrial sectors that are under severe pressure, I think that there will be a reasonable increase in day-to-day volatility for the rest of 2008.
NDTV: What about the political and economic front of it, Robert. We have elections coming in, may be in May, maybe much sooner. Then we have the NSG waiver through for India, which is good news as far as investment for four-five years is concerned and then we have the new governor at the RBI. So how do you position their moves and the impact on our economy?
Robert Parker: As foreign investors let me tell about what we focus on. There are two things. First, is there political stability? In any market, doesn’t matter whether it is a developed market or an emerging market, political instability, both domestic and geo political, can frighten foreign investors, often. I would argue that the capital inflows that we have seen in the last few months, out of Russia, one of the major reasons there is geopolitics. So political stability is critical. The other question is the environment, not just for the foreign investors but also for the domestic investors. If the environment is such whereby the privatisation plans are clearly on track, if the tax regime is investor friendly, if there is an economic policy which is encouraging economic growth. If you have a political regime that is going slow on privatization, free market reforms and efficient capital reforms, then it will clearly discourage foreign investors.
NDTV: India has been tightening its interest rates quite substantially over the past couple of months, do you believe that it’s not a trade of slower growth vs. our tact on inflation.
Robert Parker: The global inflation problem is been primarily due to rise in food prices and rise in oil prices. That is now reversing. What worried the central bankers worldwide is what we call the secondary effect i.e. the extent to which the headline inflation increase translate into higher cost pressures o0n a heavy front.
NDTV: What about the big reaction to the NSG waiver for India? Did it excite you on India’s potential?
Robert Parker: That is a difficult one to go, I’m really not sure. It’s too long term an issue to be commented on now. What’s driving global investors in terms of their attitude towards India is what is the valuation of the market, what’s going to happen to the corporate earnings and are the macro economic and political policies friendly for investment?
NDTV: In which sectors in India is Credit Suisse dipping money?
Robert Parker: We like to invest in No1- the consumer and the retailing sector, because to some extent India is Stronger in these sectors and secondly the financial sector. I think we should touch upon this sector because banks worldwide have been sold out because of the problems in the US and to a lesser extent in the UK. In terms of India, there is no sub-prime problem, there is no banking problem and the bad debt ratios remain very low indeed. So the banking, in Asia and notably in India is actually attractive. I think and I have to note that the asset managing industry is very strong in India. When I think of the future of mutual funds and life insurance sector, I see very strong growth prospects for India. Finally I think that the infrastructure sector is going to see major expenditure.
NDTV: You said the asset-managing sector in India is exciting. So what are your plans to capture the pie?
Robert Parker: We are reviewing it. I think there are some very strong local businesses here in India and they are exceptionally well managed.
NDTV: Do you think that India can deepen its capital markets substantially or, our we making any progress over the last couple of years?
Robert Parker: There are two ways of looking at it. The first is that5 we look at the development of the capital markets. The technology behind the stock exchange here in India, is world class and the development of the Indian equity market has been very a successful mode. Where the Indian need to work a little is the corporate bond market. I think that’s still ill liquid and difficult to trade. The asset management sector is made up of the Mutual fund industry, the life insurance industry, the pension fund industry and the mobilization of private saving funds into asset management products. The mutual funds sector is well managed. The development of the pension fund industry is critical and should be focused. I think mutual funds and life insurance sectors have strong growth prospects.