• MARCH 23, 2002

"It is important to get people educated. Only then will they be able to make better judgments."

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 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, Ajit speaks on a diverse range of subjects from the budget to Ayodhya and state of the global equity markets. Ajit goes on to enumerate why he believes in the U.S economy.

EQTM: Let us start off with the recent budget. What are you views on the same and why?

Mr. Ajit: I think the budget in many ways is a non-event. Once a country is a signatory of the WTO, a lot of issues, especially in relation to the tariffs are already known and the direction over a longer term is not ambiguous on these matters. Having said that, there could be a lot of targets to adhere to, as we are partners to the treaty. But even within the global constraints, if you will, that the budget has to be framed, we can still make some national statements. And the few national statements that have come out of this budget are pretty negative.

One, taxation regimes leave much to be desired. Currently, it seems, they can be changed & reversed very easily. A very glaring example is the dividend tax, which was taxed at the individual level moved to the company level and is now back on the individual. When you have an uncertain tax regime it does not give a sense of foundation for long term planning.

Among the powers vested with the Government, one is the decision on where it wants to spend its money and what the focus and thrust is on. We heard comments on roadways, ports, power and other infrastructure. There was also mention of real estate and I think that was the single biggest disappointment, at least in my mind. It has been recognized that real estate demand, and especially in developing economies, is a very fundamental driver of the economy. If one opens up that sector there could be a lot of multiple benefits coming through. And that to me is the biggest drawback that foreign participation in that sector has not got the expected boost.

So on the whole, the budget is not telling me much and there seems to be a lack of vision. You have a Finance Minister that has delivered four budgets and each of the budgets, in many ways, has been disappointing.

EQTM: You have been tracking the Indian market/economy for more than a decade. What in your opinion are the positive developments? What are the three things, you think the government needs to do in order for India to break into higher growth trajectory?

Mr. Ajit: Some of the good things that have happened since 1991 are that taxation rates have come down on the personal and corporate level. Tariff rates have come down. A lot of the bottlenecks in transportation have been removed or reduced. Basically, if you can have free movement of labour, capital and materials, resource allocations will tend to become optimal. However, infrastructure to support these moves is lacking and that, I would say, has been the negative over the last few years.

Among the crucial elements where, in my mind, the Government needs to increase its focus is population control. Incentives could be given to citizens to have a lot fewer children. The absolute size of the numbers is a strain on the system. And larger numbers is only going to make it all the more difficult to grow per capita GDP. Another would be education. The Government needs to spend on these long-term projects. Also, the Government should separate politics from religion.

However, all these issue are very difficult to implement and they have not even been touched. One of the reasons could be the politically sensitive nature of these issues.

EQTM: Ayodhya once again reared its head. Many more lost their lives on the contentious issue. What was the reaction from the international press? What is the general opinion of people around you? What is your view on the subject?

Mr. Ajit: The American press carried a lot of the stories, which included the attack on the train and of course the reaction thereafter. The general comment from most people I spoke to was that India has put the clock back ten years. America is waging a war against bad elements and maybe some people expected that Americans would understand. But that is not the case. I do not think people understand mindless stuff. Press reports have carried some of the gruesome incidents that occurred and people are not going to think positively on that.

India came out as a laughing stock, if you will, as we never seem to get our act together. But there seems to be a complete disconnect between the Indian people and the Government. A lot of people I spoke to, and this is a shameful thing to admit, wished that casualties had taken place when terrorists attacked the Parliament. This shows you how different the Government is from what the people want.

Personally, I think, we, the people, have to figure out what's important for us. Is building temples and mosques important? Or is trying to build a decent standard of living important? And then try and figure out how to get there. But, until you are very clear on what you wish to be, you are always going to have this problem. Which is why it is important to get people educated. Only then will they be able to make better judgments.

EQTM: You are part of a group that invests in India. How much do these events affect foreign investment flows in the country?

Mr. Ajit: Not a lot. I do not think these events would affect foreign flows into India. The country has already shown its strengths and weaknesses. Its shown strength of economical manpower with a lot of talented people. It has shown weakness by events that just occurred. Many who invest in India are not surprised by all this. If at all, they are disappointed that these issues do not go away.

EQTM: The global economy seems to have bottomed out and U.S, as many say, is well on its way to recovery. What is the general outlook for the U.S markets?

Mr. Ajit: We have been more optimistic about the U.S economy compared to many others. I personally track the U.S economy as a country analyst and in my last note, the view was that the U.S, as a country, as a people, is one where business matters the most. The shock of 9/11 did affect a lot of people but 6-8 weeks later the local newspapers were back to covering the regional news. Al Queda and the rest of that stuff had fallen to page three and five. People just got back with their day-to-day life. The capacity and ability of companies in America to adjust to changes in economic environment is amazing and second to none.

Japan has been in a recession for the last 10-12 years and companies are still trying to figure out what to do. Europe, still to some extent, has a socialist tilt. On the other hand, in America, labour policy is very flexible. Overnight, companies can cut down staff dramatically but at the same time ramp up equally quickly. American Airlines, post 9/11, reduced staff and flights and six weeks ago the company announced that staffing levels at the Miami airport, which is one of the major U.S hubs, is back what it was on 9/11 and flight schedules are back to what they were on 9/11. This ability, to react quickly, is what puts America way ahead of others. And that's what makes me optimistic about U.S. Even if they have shocks, and surely there will be many more as we go on, U.S has the ability to come out of it very, very soon.

EQTM: In a downturn while other countries/markets tend to deflate to reflect the somber prospects, U.S seems to be keeping steady, as global funds fly to quality assets. Is this likely to undermine a rally in case of economic upturn?

Mr. Ajit: The U.S is a large chunk of a global index. About 51% of global market cap is accounted by U.S listed stocks. So, even if you are neutral on the world you will have that much invested in U.S assets. But that's not to say that it should always be that way. Obviously, valuations matter a lot and U.S stock valuations have been climbing higher over the last 5-6 years. But if you look at P/Es in relation to where interest rates are and in relation to returns of alternative asset classes, then valuations still have some room to expand. Today, in the U.S, if you invest in a certificate of deposit (CD) for either 3, 6 or 9 months you can earn 1.50% - 2.25%. Now that is unattractive even for the elderly people. Therefore, in my view, people would rather invest in equities and take a little longer view and wait for the rebound.

A key thing one has learnt in the U.S and globally is that you have to be very careful of where you invest. Those that invested in the highflying tech stocks have lost a lot of money, as the once highflying tech stocks have come down very rapidly. So, I think, there has been some amount of realism on valuations in the U.S, which is good. One can justify the 22-24 P/Es, which U.S markets command by saying that interest rates have come down from 6.00% to 1.75%. Even the long bond, is now trading at 5% when it used to trade at 7-8%. In a low interest environment, you automatically give higher valuations to stocks. And to that extent, it is justified.

EQTM: With an expected upturn in the global economy, how would you re-balance your equity portfolio?

Mr. Ajit: I would not like to comment on that directly. The way we look at stocks, we do not take bets on geographical areas. We look at companies on a sector basis, globally and invest in sectors, which are attractive and then in companies, which have got the best valuations within those sectors. If that company happens to be headquartered in Japan or India or China or Europe then so be it. We just go where we find the best valuations within a sector.

EQTM: Given the choice of investment avenues in India, where do you think the small investor should be putting his money?

Mr. Ajit: They should, and I repeat that, they should be investing in equities. They should be investing in a sector that has long-term growth potential, investing in a company that is a leader in its sector with good management. And investing in a company stock that has a good valuation advantage. What people have to avoid, is trying to find the next bubble and hope to ride it all the way to the top and then get off. It is very, very difficult to time.

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