London: Rajiv Jain can’t understand Indian stock bulls.
There’s scant evidence to justify the optimism over the country’s growth outlook and company earnings, said the former star asset manager at Vontobel Holding AG who now manages funds for Goldman Sachs Group Inc.
The nation’s shares and currency are also overvalued, said Jain, whose Goldman Sachs GQG Partners International Opportunities Fund has returned 9.3% this year to beat 91% of its peers.
The S&P BSE Sensex Index has advanced 11% this year, the most among Asian emerging-market gauges after the Philippine Stock Exchange Index.
Jain, who oversees around $2.5 billion from Fort Lauderdale, Florida, spoke in a phone interview:
Why the negativity on Indian stocks?
India is the single most expensive market globally. It’s more expensive than the US. The currency is also overvalued, and earnings estimates have been declining the most among any market this year. Top-down, from a political perspective, it looks good, but I think from a bottom-up, company-wise scenario, it’s not good at all in terms of where the general banking system is, where credit growth is, where the yield curve is. “People are usually either too pessimistic or too optimistic on India” and they’re too optimistic at the moment, he said.
How’s the macroeconomic backdrop looking?
The non-performing loan situation in India is pretty unnerving. Non-performing loans are running at 12 to 13%, which is higher than the Chinese. What could go wrong, for example, if oil goes higher? That will be a negative and the current-account deficit will get worse, not better, from this level if the currency stays there. Interest rates are already low.
I don’t know how they will go lower from here. Indian credit growth is down 5 to 6%. That’s the lowest in decades. The only engine firing is retail lending. Interest rates are low and they should head higher as inflation ticks up during the second half. Job creation in IT services could slow meaningfully from here. Cement sales declined over the last 12 months for example. Real estate markets are still pretty slow, but paint companies are selling at 35 to 40 times earnings.
What’s your view on other emerging markets?
In Asia, I’m not finding that many opportunities. Asia makes 70% of the emerging markets stock index and that by itself should give you a pause. The whole of Latin America is less valuable than Taiwan. Go figure. There’s too much optimism on a bunch of Asian markets while fundamentals may not be as good as people think, and that might argue for shifting into Latin America.
Brazilian assets have done well in the last 12 months, but if you take a longer-term view, asset prices are still very attractive. The same can be said for Peru, Colombia, maybe Argentina, but less in Mexico. It creates an opportunity. Our focus has shifted to countries which have not done well for a host of reasons. Things in Russia and a couple of eastern European countries look interesting. Turkey is intriguing as asset prices look cheap. But the political set-up is difficult to call and it’s very dependent on foreign capital. If you get market volatility, Turkey would be vulnerable but asset prices are cheap. Bloomberg