Mumbai: Managing director-head of Multi Strategy Research Nomura, Paul Schulte is bullish on food, water and irrigation-related companies. He is also positive on Asian auto stocks. He believes the markets will continue to go higher. Edited excerpts from an exclusive interview:
There seems to be a feeling among many who watch the market that this could possibly be looking like the beginnings of a new bull market. Would you go with that?
We have had that view for a number of months now that central banks have taken risk out of the market and they have taken that risk away from the investor and given it to the taxpayer around the world. Many of these loans out there, trillions of dollars are basically at standstill between banks and borrowers especially in Eastern Europe. What we have is basically a world where Asia is entering into this whole financial crisis in terrific shape. The banks were at leverage levels which were all-time record lows, currencies are under valued, banking systems are intact and savings are, if anything, in excess. You have firepower of dry powder in the form of equity with capital adequacy ratios of 17-18% all over the region (for banks). You have leverage levels of 13-14-15 times and 10 times in Indonesia and Thailand and you have loan to deposit ratio of 60-65% in most countries throughout the region.
Positive outlook: Paul Schulte of Nomura.
We have already seen a tearing run in commodities these last few days. The CRB index has put on nearly 10% in three days. This asset inflation that you’re referring to, do you think eventually this is going to take us to an asset bubble kind of situation with crude going to $100 (Rs4,750) plus a barrel once again?
I think that is a possibility. If we talk to people in various multilateral institutions, they will say this is a possibility. Rising interest rates right now for almost any major country in the world, including Asia, would basically be politically out of the question. Unemployment is still rising in almost every country in Asia. The output gap is still very large for most countries in Asia. Inflation is non-existent. The producer price indices are anywhere between minus 4% and minus 10%. All the central banks have models which they have been relying upon for many, many decades which tell them right now is the worst possible time to raise interest rates even though we are seeing a lot of this frothiness in financial markets and in real estate. This is what you get when you have an undervalued currency with undervalued property markets and banking systems which are in terrific health. They are going to be a beneficiary of all this liquidity from the West and the only way that Asia can have a party-pooper here is if the West recovers which I think is something of a pipedream right now even though we may get growth of something like 1% in the next year or so.
Is that what equity markets are betting on because the sceptical view was that even with two-three quarters’ time you will once again have inflation rising and the brakes will come down on this easy liquidity situation and that’s the point at which markets may turn? Do you think equity markets are betting on the fact now that that won’t happen?
Equity markets are doing this dance with central banks, you are totally right. But there is one vitally important thing that people are not talking about. In India, in China, in Brazil, real interest rates are extremely high and India has one of the highest real interest rates in the world right now. But what we have right now are interest rates in India, China, Brazil and even Indonesia which are averaging 4%.
Those real interest rates used to be historically 1-2%. So, in fact, what we have already in India is extremely tight monetary policy if we look at real interest rates. What that means is that if inflation goes up, real interest rates should come down and then you can really have asset price appreciation if you want, unless the central banks intervene aggressively to cut it off. I doubt that sincerely.
I just want to step back to earnings season that we closed up last week and a couple of sectors have actually come up for rerating in the Indian market such as the autos. Is that a space that you like and are excited about right now?
We look at some of these industries in the world and we ask ourselves where is capacity being taken out because we want to be in industries where capacity is being taken out of the system appreciably. And the biggest shortage in the world is capital. That’s why banks are doing so well because the banks have the capital. Number two would be in the area of food and food production.
Number three, there has been a great deal of capacity being taken out of the system in autos. One of the reasons why Asian auto companies are doing very well is because the banks have tremendous amounts of firepower as I mentioned in terms of capital and in terms of risk assets and so the capacity to create risk assets for banks is in large part allowing this growth in auto sales and in mortgages.
There is another sector that’s very top of mind for the market over here right now and that’s power because there is tremendous supply in the primary market. I am sure you know of that. Any stories over there that you like and would like to be part of as well from the primary market offerings?
Yes, India has a chance to be a very important bread basket, so I would grab with both hands any sort of companies that are coming up which are in the areas of food production, irrigation, water treatment and anything that can allow yields to go up because we are in danger of having a very serious food shortage. I want to own the companies that solve the shortages because they have the pricing power—banks, food, and those two things I would be looking at the most.
Real estate prices have gone up in India as well. Is there a trend that you’re seeing across the region, money inflating even the real estate assets?
That’s absolutely right. All over the region we are seeing, almost without an exception, we are seeing sole prices back to almost their highs in 2007. We are seeing a great deal of asset price inflation in China, Hong Kong, Singapore, Indonesia and in Mumbai.
There is virtually no market that is not seeing a very strong increase in prices in the real estate markets across the region and again that is because we have liquidity entering into markets with unencumbered assets that do not have collateral problems, with banking systems which have near multi-decade low leverage levels with loans deposit ratios that are way too low.