Special Report: What is India, and what is its Future? By William Ortel.
We’ve done quite a few special features over the last year of Inside Investing, but this is the first time that we are paying particular focus to a country.
There are a couple of reasons for that. Obviously, India is important to the investment profession and to individual investors around the world, but so are many places. Why did we start here?
We began to see a number of reports focusing on India as a place that was either doomed to political infighting and runaway inflation or as the “white knight” of an investor’s portfolio: one of the few places in a growth-constrained world that was likely to see expansion over time.
It seems, perhaps, like all of these things may be true. And they don’t necessarily contradict each other. The interview below with Sunil Singhania, CFA, and all of the interviews and posts that we will publish over the next couple of days, represent our attempts to get leading investment thinkers to explain to us exactly how that could be.
Listen or read on, and be sure to subscribe to Inside Investing so you don’t miss the chance to benefit from the perspective of some truly remarkable people. Of course, we are also hosting our annual Indian Investment Conference that is well worth attending for even more great perspective from our global network.
CFA Institute: It’s Will Ortel here with Inside Investing at the CFA Institute, and I’m in the New York office of CFA Institute, but I am on the phone with Sunil Singhania, who is the CIO of Equities at Reliance Mutual Funds. He’s also (in a sense) my boss’s, boss’s boss at CFA Institute. He’s on our board of governors, the first Indian ever to reach that lofty perch. Sir, I’m on my best behavior.
Sunil Singhania, CFA: Thanks a lot.
I want to ask you, we were just speaking, and I rattled off a bunch of questions and said, “Is it OK to talk to these”? and you said, “That’s what people usually ask.” What don’t people usually ask that they perhaps should be asking?
I don’t know whether they should be asking or not, but domestic investors generally, and I’m talking about the equity investors. They’ve had a phenomenal sort of period between 2003, and 2008, investing in equities, where they made upwards of 30/35 percent compounded returns year after year. The account now is growing, there was huge money flow, and everything was going on well.
What has happened in the last five years, Indian equity markets have generally been flat, and the domestic investors particularly ask, “What is long-term”? Investors who have come in, in the last four or five years, have not been any return.
That is what normally the investors ask, and from our perspective, the only perspectives we can share with them is that, “Yes, the last three, four, five years have been tough. There have been some things which have happened for the first time in the world in the last hundred, 200 years, and it’s more sort of a one off thing.
You have to look at growing economy from a longer term perspective, and that is what we try to explain. From the global investors perspective, India has always been a favorite investment destination. However, they can get confused with, you can say, a little bit more democracy than what we need. So government policies and politics is what normally the foreign investors will ask about.
Though again, just to give you our perspective we have seen in all the last 20 years, all government has been coalition government, and it has worked out pretty well, so the concerns are definitely there in the near term, but from our perspective they should also be looking at a slightly longer period, and they’ll get their own answers.
Yeah, in thinking about this long-term, one of the things I have to ask is, as an offshore investor who has invested in Indian equities in the past, I occasionally form part of a cohort that can be quite troubling for domestic Indian investors, where I combine with many other people in New York, and London, and elsewhere, into these flows that can really, really distort things for you over there. How important are international investor flows for you, and just how closely do you watch them?
Listen, it’s a great question, but if you actually see the trend of the global flows, it’s almost every year has been positive despite what is happening globally, and despite what has happened in the near past in the Indian economy, in terms of a slowdown. Global investors are looking at India from a longer-term perspective, they’re looking at this 1.2 Billion population, they’re looking at a very young age. We still have a median age of less than 25 years by 2020.
There are things that used grows in their consumption phenomena, and as a result of which global flows have always been positive. To answer your question whether global flows are important, there are definitely very important.
As an economy, we import a lot of stuff. We are a growing economy, and we lack capital. For all these reasons, we definitely need capital flows into the country, not only to bridge the current account deficit, but also to give that boost which will require to set up capacities, to set up infrastructure, and that is one key reason, or one key need which will enable India to come back to that seven/eight percent growth.
Our own perspective is that flows into India have been really strong, even in these last three years of extreme global volatility, and uncertainty, and similar situation in domestic India. We have seen foreign investors pump almost $65 billion into the Indian equity markets. Year to date Indian equity markets, outside of Japan, are the second largest recipient of global flows.
We’re not taking US, because we are mostly in a domestic flow, but international flows outside of Japan, India is the second largest. Global flows are important, but at this point of time we feel that there is in fact a narrative saying that the flows should continue to be quite positive.
When we talk about investment realities, there are probably the equities in your portfolio, but there are also the Rupees in your wallet. How do you think about your currency right now? It seems like the easy narrative for many years, when thinking about India, was that it was a place for outsourcing, and for structural cost advantages, and it seems like with a declining currency that may again be true, at least at a superficial level.
Do you think that that narrative has any resonance, or is it overly simplistic?
Currency movements are very complex, and frankly I will admit that I am no expert on currency. Having said that, the last six months/nine months of currency movement definitely has been a little bit worrying, we have seen currency depreciate almost 25 percent before recovering a little bit. There have been multiple reasons for it. Obviously the reasons in hindsight are very easy.
We have had a huge trade deficit led largely by oil and gold imports, and we have also seen a scenario where the US economy and the developed economies have been recovering, and as a, you can say, a safe way of investing, investors have in fact been pouring money into India’s economy.
Cross-currency movements also led to some impacts which not only that Indian currency has, that we figure a lot of other emerging market currencies like Turkey, Brazil, Indonesia, and so on, which have seen a similar kind of volatility.
Having said that, again, you can see the period from 2001 to 2010 or ’11, we saw Rupee in fact appreciate by around 15 percent over a 10 year period. It is not fair to say that the Rupee depreciation is a given year after year. We have seen normal periods where the Rupee has stayed quite stable.
All we need is a return to confidence. We have had a new RBI governor but now that we write policies to encourage investors to move away from investing in gold, into yielding assets, which are the financial assets, which has led to some fall in gold imports.
Our current account, we have to take it to looking like hitting five percent is now expected to be more like three percent. Yes, given the fact that the global world is a more volatile place, short-term currency movements are definitely the order of the day. But I’m more optimistic of a more