Mumbai: Fund manager Edward Pulling, who oversees $6 billion (Rs29,100 crore) of funds in India at JPMorgan Asset Management, spoke to CNBC-TV18 on the challenges of investing in India and why realty offers a good long-term investment opportunity. Edited excerpts:
Is the bear market over?
When I first started investing in India, about 15-16 years ago, I think the Sensex was around 3,000-4,000, and now we are at 14-15,000. I think that in three-four years, we will be at 30,000. So by almost any measurement, that is a bull market. This being India, there are going?to?be plenty of bumps along the road. That’s a part of the fun and challenge of investing in emerging markets.
Investment grade: Pulling says he would like to see more transparency in the infrastructure sector, which offers good long-term opportunity. Paul Hilton / Bloomberg
Are we then saying that what happened in 2008 through the early part of 2009 shouldn’t be classified as a bear market at all?
You can call it a bear market or you can call it a very painful part of my life. I was certainly caught unawares by the severity of events last year. I think almost everybody was.
Would you say that there is a touch of exuberance in the market now or not quite?
Let’s put some numbers on it. Where are we right now? (A) 14.2 (price-earnings multiple) on the Sensex. OK, March 2009 EPS (earnings per share) is going to come in at around 850 and let’s just say for the sake of ease that its 850-900 for March 2010, then you start to see EPS ramping up, and once the earnings upgrades kick in, you will see March 2011 EPS at around 1,000. So where are we? That puts us at 14 times March 2011 earnings, swing it back for calendar year and you are almost at 15 times December 2010. The rest of the Asian region is probably on around 14 times 2010 earnings with a consensus earnings growth of around 30-33%.
China is on a pretty much exact same multiple as India, so is the market over extended? I don’t think so on valuation terms as the market moved very sharply in the past three months of the high Ebitda (earnings before interest, taxes, depreciation and amortization) stocks significantly outperformed. Yeah, is there a mean reversion trade unfolding right now? Quite possibly yes. But again, I am not going to get overwrought over short-term movements. The price lies further out. 2011 to 2013 when the earnings growth in India will really ramp north.
In February, you had said that people are talking about 850 (EPS for the Sensex), but we probably won’t get to 850. We get to 700-750, if we are unlucky, we get to 650. Has that scare receded that we are not going to see maybe a decline of 10-15% in earnings this year?
I think the situation has moderated. When we spoke in February, we were coming off what every single company told me, what the banks have told me, the most difficult quarter was the December quarter. The credit markets had frozen up, there was no liquidity, order books were gone. So has that situation ameliorated? Yes, of course, it has. And now slowly but surely we are reverting back to more of a steady environment. The severity of the earnings downgrades looks like the past. So I don’t think we are going to see 650 as an EPS number for Sensex.
Sensex at 30,000 in 2012-13?
Let’s explain. Let’s go back to the denominators. 850-850 then 1,000 in March 2011. I think that between March 2011 and September 2013, earnings in India can double.
So you are saying in 2006-07 this played out, and Sensex earnings grew by 35% per annum. You think after three years of earnings consolidation, we could get back there again?
Propelled by which basket of stocks? Just infrastructure? Or commodity as well?
It is primarily infrastructure you can look at it. Power, ports, airports, steel mills, maybe roads component of property also. Those will be the biggest contributors. There are some interesting projects under construction right now that will take a while to complete. So then, of course, you will have growth from financial services.
Most of them are from one sector: realty. Your view changed? That’s where all the new paper is coming from.
My view on realty has always been that it is a good long-term opportunity.
Meaning, don’t touch it now?
I would personally like to see a lot more transparency in the sector. I have large investment in Chinese property companies and they have worked wonderfully in the past three-four months. That was a sector on its knees last year and has revived wonderfully this year. I would love to see the same in India. It is a great long-term opportunity. You and I can’t deny that the property is under-represented in the stock market, in the economy, that there are million of homes that have to be built in this country, low, medium, even upper-end. So would love to invest in the story, but right now it is not attractive enough.