Nisha: Do you think the infrastructure theme will gather momentum after last year’s underperformance?
Shah: The infrastructure sector had a relative underperformance vis-a-vis the broad market. Today, we have a country whose infrastructure is not good enough to support its growth ambitions. We have power cuts in almost all part of the country, our ports are jammed, our roads are congested, our railways are crowded, our urban as well as rural infrastructure is decaying. All this needs to be repaired and rebuilt. That opportunity is large and as we augment our saving, which is now running at $350 billion along with FII (foreign institutional investors) capital, all of this will happen in front of our eyes. As the infrastructure sector doubles in size, the stocks of these firms will follow. Have patience, mangoes don’t grow in a short time.
Nisha: But do you see the bottlenecks ease out and genuine development.
Shah: Yes, 20 years ago we had to wait for the telephone for more than
10 years. Making a call to an outstation centre was a day’s job. Today, we have a telecom sector that is best in the world, we have more subscribers than the population of the US, the UK and Australia, our rates are cheaper and our quality is as good as theirs. What happened in the telecom sector needs to happen in other sectors, such as roads, power, port and water. Will this take time? Surely. But will this happen in front of us? No doubt about it.
Nilesh Shah, Deputy Managing Director, ICICI Prudential Asset Management Co Ltd
Meena: Infrastructure projects take years to throw money off, what is then the logic of an infrastructure investment, especially in India, where politics takes bites out of infrastructure projects either in equity or otherwise?
Shah: The crows are black every where. Corruption is not the monopoly of Indians. The infrastructure sector is a long gestation sector, it takes time to make money in that sector. Projects like road or port or power take time to build and make money. However, the market has a habit of discounting the future—even if the power plant is going to make money five years down the line, the market will give it a value in terms of discounted cash flow. So, infrastructure stocks can give returns based on execution, future potential and growth prospects. We recommend you to invest in our fund as it is a diversified fund and gives exposure to different sectors, such as cement, metals, power, telecom and engineering, and also different companies at various levels of growth cycle.
Also See | ICICI Pru Infra (Graphic)
Livemint: What is your equity and debt market outlook?
Shah: On the debt market, we believe that inflation is running high on WPI (Wholesale Price Index) basis. RBI (Reserve bank of India) is trying to control it by raising rates and keeping liquidity under check. In the past, we have always controlled inflation by raising rates, taking out liquidity and curbing demand. This time RBI is probably trying to keep reasonable liquidity, keep rates a bit on the lower side and create supply which can meet demand and keep inflation under check. On top of this, the GoI (government of India) has a large borrowing programme. The GoI, as per the Budget, is likely to borrow 36% more than what they borrowed last year on a net basis, this is putting pressure on interest rates. We expect interest rates to go up by 50-75 basis points over the next couple of months. Investors who are looking to invest in debt funds can look to invest in Income Opportunities Fund or hybrid funds like monthly income plan or short term bond fund in the current environment.
Indian equity markets are in line with peer groups like Brazil, China and Russia on a one-year basis. However, on a YTD (year-to-date) basis, it is underperforming developed markets like the US and Japan. Indian equity markets have done well in the last one year and are now trading at 17.5 times FY11 earnings. This is at the fair value plus level. This high valuation is supported by robust earnings growth in Q4FY10 and expectation of good monsoon and lack of bad news from the global market. We are at a stage where all the good news is factored into the prices and there is no bad news on the horizon.
Moreover, from an investor point of view, it will be worthwhile to remember that over the next, say, 5-10 years, we will double our economy and then again quadruple it. This high growth in the Indian economy is something investors, especially foreign investors, are attracted to. It is time for Indian investors to be long-term investors and invest in quality, blue-chip Indian companies rather than trade on them for short-term results. The equity markets are bound to go up and down. But if I take a long-term call on India, I am sure it will be hugely rewarding to invest in quality firms.
Mihir: What is your recommendation to investors, asset class-wise?
Shah: We advise three things. First, start early. The compounding of return is something which doesn't stop, so the earlier you start, the better for you. Second, invest regularly. There is no point in timing the market. If you see the track record, people who are considered experts on market, including myself, collectively failed to predict the downtrend of 2008 or uptrend of 2007 and 2009. There is no way anyone is going to be right for 2010. So don’t waste your time timing the market, it is better to put time in the market. Third, have a balance, have an asset allocation. Do not put all your eggs in one basket.
Rajiv: How committed is the government to improve the country’s infrastructure?
Shah: If we see the WPI numbers, they are at divergence with CPI (Consumer Price Index) numbers. If we see the PCE (personal consumption expenditures) deflator, it is at divergence with both WPI and CPI. Inflation numbers world-over have the problem of delivering accurate measurement. In a diverse nation like India, inflation numbers are bound to be perceived differently by different segments of the society as it is not possible to create a common basket of consumption that can fit the whole country. The good thing for inflation is that we are trying to tackle the menace from the supply side rather than just the demand side. A fast growing economy like India is likely to suffer from Inflation as its supply creation is lagging the demand side.
Akshay Dutta: As a renowned market expert, where do you see our economy?
Shah: I am a student of the market, every day I learn new things. I see India going back to its position of the largest economy in the world. For thousands of years, India and China were the drivers of the global economy. We have seen Vasco da Gama and Columbus sailing in search of India, we haven’t heard of any Rambhai or Shyambhai going to Europe in search of better prospects at least in the middle period. Indians lost out once the colonization systematically changed the country’s agrarian economy into cheap supplier of raw materials; 150 years of colonization took away our wealth. Now we are on our way to where we were for a large part of human history. I think India will become a model country for the world in terms of size and scale.