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"India is a lot more different, more advanced in many sectors than China is." - Views on News from Equitymaster
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  • Jul 12, 2000

    "India is a lot more different, more advanced in many sectors than China is."

    Ajit Dayal is the co-founder and Chairman
    of Equitymaster.com and Personalfn.com. He is the Deputy Chief-Investment Officer of Hansberger Global Investors Inc, a company, which manages $ 3 bn in the global markets.

    Ajit is one of India's best-known investment advisors; he set the stage for the entry of FIIs in India. He founded India's first equity research company in 1990 (this company has evolved from that pedigree).

    In an interview with equitymaster.com Mr. Dayal spoke about the global economic environment and the current state of affairs in the US stock market

    EQM: How do you find the global economic environment at present? Are there any threats to sustaining the existing level of growth in the global economy?

    Mr. Dayal: I think when we had the Asian crisis in 1997 July which began with the Thai baht devaluation, a lot of people including myself saw the domino effect of the Asian emerging markets, the Latin American emerging countries and then of course Eastern Europe and Russia. We saw those currencies getting hit, the economies slowing and inflation rising. Many of those countries in defense of the rising inflation and falling currencies had to increase interest rates very rapidly, which then again hurt GDP growth rates. Based on this very sharp decline in GDP growth rates in the emerging economies, which went as low as -10% & -12% for Korea and Russia respectively, a lot of us expected to have a spill over effect of that in the developed economies. I mean the sinking emerging market economies would slow down the growth rates of the developed countries.

    Fortunately, we haven't seen that. We saw the U.S gathering momentum, Europe coming out of the slow growth rates starting in 1999 and Japan, which most people now agree, has stopped falling with the economy having bottomed out. Thus most of us were proved wrong at least those that had predicted a slow down in world economic growth. Given the fact that we do not see on the horizon another Asian crisis, chances are that GDP growth rates will be relatively stable. They will not be as high as what we saw in 1999, as post 2000 the U.S economy will slow down but overall growth will be relatively stable. There should not be a global recession, which many people including me were scared off in 1997-98.

    EQM: Please comment on the state of the US stock markets and where do you see them heading in coming months?

    Mr. Dayal: Many people forget that stock market prices are a function of the money that is channeled into them. I mean more the money supply the more the liquidity and chances are its going to lead to an asset bubble, which could be in properties, stocks etc. That is what you see in the U.S. One is not trying to discount or limit the importance of the technology revolution but it is important to note that the U.S economy has seen money supply growth rates of a fairly high number. Thus we see the Fed trying to increase interest rates and consequently, reduce money supply. When you are reducing money supply there is less money to be channeled into stocks and hence stock prices come down that is the macro trend that should be there. Add to this the technology factor where you have IT as a great tool in the U.S, which has been proved to increase productivity in the last five years. Then you are looking at another secular change; on the one side you have the de leveraging of the U.S economy whereby money supply will hopefully be sucked out so share prices should be falling but at the same time people have bought into the new story of the new economy.

    Hence, people believe that it doesn't really matter if money supply is going down, the stock market can keep up the climb. We have never seen that in history. Typically when, money supply is sucked out from the economy by raising interest rates, stock prices tend to fall. The next trigger for their sharp fall in the U.S particularly is when technology companies that are valued for huge growth and some earnings falter on their growth and their earnings don't materialise. In fact they post even higher losses and someone gets up and says why are we buying this stock? Why are we paying so much for this stock? I am a believer in technology, we have built Equitymaster around technology, but the question is what do you pay for technology? What is the value of technology? And thatís where I think I have a problem. So personally, I think the U.S is set up for a fall, the timing of which is uncertain. So would I be buying the NASDAQ today, "no", would I buy the NASDAQ 30% lower than where it is today, "probably".

    EQM: How does India fare as an investment destination in the global environment?

    Mr. Dayal: I think India's ranking and perception has certainly increased a lot, I am talking of FDI as opposed to portfolio investments. I'll touch upon both. On the FDI side there are very few economies of India's size and sustainability. There is China and there was Indonesia. On the Latin American side we have Mexico, Brazil, Argentina. Mexico is probably an alternative to an India or China. The geographical proximity that Mexico enjoys with the U.S is a great advantage, they are in the same time zone, and you can have a factory in Mexico and freely supply labor, parts, and products. To get to India, China or Indonesia one needs to make a twenty-four hour journey from the U.S. So although Asia will see a lot of FDI flows as it has done in the past, I would still expect Latin America to get a large chunk of the flows as Mexico has been getting.

    The fact that in 1997 you had the devaluation, that China has an element of fear and mystery, people will not be committed to making investments in China. India has had its own share of problems but I think people will still come to India, India is pretty much up there but probably the third destination for all U.S based multinationals. The first is Mexico, second China and third India. For the European guys, first it is China and second India. So it is up there in the list and is getting better and I think the Government has taken some great steps in the last ten, twelve years in allowing FDI money into the country. From the portfolio perspective, I think people forget that when you look at a global model such as those built by Morgan, Financial Times etc. India's market cap is 0.5 % of the world. So if I had Rs 100 in my portfolio as a global fund manager and I wish to have a 1 % holding in every share at an average, chances are that I have no share or 0.5 share in India.

    From a global portfolio perspective India has a very, very small share. I think India is still relatively important from the emerging market context but on the global context it is insignificant. It is going to take a lot for us to be of any significance from the portfolio perspective. It will be a function of the economy, we are a $ 350-400 bn economy depending on the exchange rate and we need to be a $ 1 tr economy, which is two and half times of what we are, if we are to make any impact in the world.

    EQM: Do you see India becoming a preferred destination in coming years? If not, what would be the likely impediments?

    Mr. Dayal: On the FDI side if we get the politics right, I think we will see a lot of FDI money, I am very optimistic about that. I did mention Mexico will be a preferred choice and China number two and India three. I think we can never compete with the geography of Mexico but I think we can compete with China and that we will win over China in many ways as it gets demystified. I have yet to meet a multinational that has a lot of positives to say about China. For example the insurance sector, which I track globally with my colleagues, there are many companies sitting in China with rep offices for the last four years and are not allowed to write even today a single policy. If they do get a license that license is valid for only a region. Whereas when they get a license in India, with the JV rules, that license is going to be valid for the whole country. So there are such differences.

    Further, qualitatively, India is a lot more different, more advanced in many sectors than China is. I think we many a time put ourselves down to much when compared to China, we forget that there are Chinese businessmen who control chunks of Asia and are investing in their homeland. Whereas, we don't have those Indian businessmen who control chunks of Industry in Asia who are putting money back into their homeland. On the portfolio side the impediments to India's growth is that our relative GDP and market cap is low compared to the world and I don't see that rising dramatically. Probably 0.5% will become 0.7% over the next two years. So instead of buying half a share I'll be buying three quarters of a share for a typical global fund that we manage.

    EQM: While investing in stocks, which factors would you give the highest weightage?

    Mr. Dayal: I think it is a personal approach, the way I like to invest for our clients and us is a long-term approach. We pride ourselves in being quasi-FDI investors. If a multinational makes investments into India, China, Indonesia or Mexico and takes a 20-30 year view, we like to take a 5-8 year view on a stock, a fairly longish term view. Basically, if you take a long-term view on a stock, what you got to be really careful about is the people who are running the business. Do they understand the dynamics of their business, are they market savvy and what are they impediments to their growth from the Government policy making point of view. I like to look at the macro framework a lot. Then try to figure out the best company in that sector, within that macro framework, that can take advantage of what we believe is going to be the evolution of that sector going forward. Some of my favourite sectors in India are cement and commercial vehicles, not because we believe that the number of cement bags or commercial vehicles is going to double over the next three or six months. But over a longish period of time we see the need for cement and commercial vehicles in India.

    We figure that TELCO will get its act together and produce high quality and hopefully relatively inexpensive products for the changing Indian environment. In cement we have Gujarat Ambuja that has great management, good vision and we have seen what they've done over the last 14 years. We see no reason why they cannot carry on their operating track record going forward. We like to invest in companies where you do not have to worry about how much of the profits are on and of the books because we trust what the management is doing. You don't want to worry about being stabbed in your back. In the Indian context those are the kind of companies that excite us, having said that does it mean we do not like technology companies like Infosys? "No" itís a fantastic company, itís a great company probably one of the best-managed companies in the world for all we know. But there is a price you pay for being in the Infosys stock and there are points in time when the Infosys stocks looks attractive and times when it does not look attractive to us as a long term investor. If we have companies that have good management we are comfortable. We are not here to punt; we are here to build a long-term portfolio for our clients.

    EQM: You have any favourite stocks/sectors (on a global basis and in India)?

    Mr. Dayal: I would not like to reveal names. But there are managements that we like, we love to keep in touch with and love to meet, as we believe they are brilliantly managed companies. Infosys, Ambuja, HDFC are very well managed companies in the Indian context. Globally, Saint Gobain, Holderbank in the building materials sector. Zurich Allied in the insurance sector. Brilliant companies, excellent strategies, a lot of comfort with the thought process at the strategic levels. These are people who understand their business very well and have been in the business for a long time. Other include McDonalds the way they have built their franchise globally. Many have stumbled along the way in terms of valuations, old versus new economy etc. But will some one be drinking Coke ten years from now "yes". Will someone be using a P.C ten years from now "I don't know" as technology is moving so much faster? Will someone be washing clothes with a Unilever product ten years from now "yes", will someone be using Windows 2000 ten years from now "I don't know, you tell me". Basically the kind of businesses that we like are longish term businesses that have some certainty evolved in them. Obviously, there are risks like every other business such as losing market share etc. But you are still going to be using soaps somewhere down the line. "Yes" you will be using software but are going to be using shareware and where does that put Windows. What people are forgetting is that the pace of innovation is so rapid that there are rewards but there are risks also.

    EQM: Is there any advice you would like to give to retail investors on how to go about investing in stocks/bonds/mutual funds?

    Mr. Dayal: Plan, Plan and Plan. I think the one thing thatís missing amongst a lot of the people I meet and speak to in the retail investor community including my family is lack of planning or a thought process. We may have many lives to live, being good souls but we have only one financial life to plan for. What people tend to forget is that there is a planning process that one needs to think about. This holds true for all people, rights from single carefree to married with children who have to plan for their children's future. There is a certain planning process missing in most Indian households. We plan very well on a daily basis for our household budgets (short term planning) but not for long term career planning and financial goals. My advice to the retail investor in addition to the planning process is to know your risk profile. Do you have an appetite for risk or not? When you invest in stocks, understand that if you invest Rs 100 it may half or double and are you willing to accept the loss on the downside. We have seen that a lot in the Indian stock market, which have witnessed waves every 18-24 months.

    In '85 cement companies were the hot stocks to be in, then fertilisers, steel, finance & leasing and now of course technology, media and telecom. These sectors are hot for a while and cool of very rapidly. Invariably, it is the retail investor who is left holding the shares, having bought it at a high price. Having been hit, his reaction is to back of from the market completely, which is wrong as it again takes you back to the planning process. Every household in India must have some form of equity ownership of a company, either directly or through mutual funds. As equity investments historically, have proved to provide better long-term return over fixed income securities. The mix will depend on the kind of person you are and the household you live in. But there has to be a mix between risk investments in equity and a less risky investment in fixed income securities. The message is to plan and know yourself a lot better.

    EQM: Is there any book that has had a significant influence on you?

    Mr. Dayal: One book I read a fair amount of and one day hopefully have the wisdom to understand is the English translation of the Upanishad as I've never learned Sanskrit unfortunately. It is a relatively small book but there is a lot of power packed into that one book. The other books that have left a memorable impression on me while I was growing up are Catcher in the Rye, which talks about growing up and The Great Gatsby, which also left a big impression on me. I don't read management books, stock market books; I read a great number of magazines on them but not books.

    EQM: Who are the three people that have influenced you the most?

    Mr. Dayal: I admire my family a lot, especially my father and my late uncle for their philosophy of work. My father left me with this one thought when I was leaving for the U.S for further studies, was to do good and be good and other words of wisdom. It all sounds very simple but fairly powerful words at 21 when you leave your home for the first time and you miss home a lot. I draw lot of comfort from my wife who allows me to travel and be away from her. In many ways my work has stolen time away from my family and I miss that a lot. The third person who I have never met but read a lot about is Mahatma Gandhi. In fact the strange part is that I read a lot about India and its people when I was in the U.S while I was studying there. This had a huge impact on me in terms of how it was so simple to change so many things that are wrong around you. Clearly a man of great vision and action and wish we had more like him around, we sure do need it.



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