Global Hedge Fund Manager Signals India Ratings Upgrade and Massive Bull Run

Editor's note: Equitymaster's co-head of research Tanushree Banerjee will be live on the Bluechip Bullrun event this evening at 5 pm. Find out how to profit from the run up in stock prices this election year. Sign up for this free online event here.

---

Does the name Guy Spier ring a bell?

Yes, he was the winning bidder who won a charity auction lunch with Warren Buffett, along with fellow money manager Mohnish Pabrai, in 2008.

By then Spier's Aquamarine fund had enjoyed superb performance, massively outperforming the benchmark S&P 500.

At the lunch, Spier asked Buffett if he took the ratings of rating agencies seriously. And Buffett replied that he did not even look at them.

That conversation, according to Spier, changed the way he assessed global equities. He took to accessing economic data points directly from reliable government entities. This allowed him to give the views of rating agencies a miss.

The reason I am referring to Spier today, is because he recently posted a video on how global rating agencies (like S&P and Moody's) have done a shoddy job of assessing India's sovereign rating over the years.

The video is titled - Why is India only rated BBB-?

In the video, Guy Spier goes on to make few contentious claims that can cause plenty of global investors to sit up and take notice. For instance, he says...

• Global rating agencies do not find it ridiculous to give India the same rating as they give to an economy like Kazakhstan.
• The oligopoly of rating agencies gives them little incentive to review their rating norms.
• The rating agencies serve the interests of their shareholders and not of common investors.
• And finally, global investors will soon realise the massive mistake they have made in ignoring India as an investment hub, thanks to rating agencies.

What is interesting here is that unlike most foreign investors, Spier did not rely on secondary resources to form his view.

Rather he dug deep into the RBI Bulletins to unearth facts that can compel rating agencies to relook at their view on India.

Spier's views on India are primarily based on five kinds of economic data wherein India presents a stark contrast compared to the West.

1. India’s share of consumption economy has barely scratched the surface of premiumisation. Over the years companies offering premium products could find a much deeper market.
2. Millions are joining the formal workforce every year and may choose to consume from the organised businesses.
3. The government could continue to fetch higher share of tax revenue to GDP as corporate profits soar.
4. India is amongst few countries set to witness capex cycles that could account for as much as 5 to 10% of GDP.
5. Unlike large Western economies that have the government debt to GDP ratio closer to 100%, India’s ratio at around 60% leaves enough headroom to remain stable.

Even a minor change in India's sovereign ratings could lead to massive fund inflows from overseas into both equities and debt.

More importantly, it could reduce the government's cost of borrowing. As also bring down India's overall cost of infrastructure spend.

Of course, Spier's views on India's sovereign rating and the possibility of a rating upgrade may sound academic. At the end of the day, the rating is an anomaly.

But what if I told you that Indian stock markets have been witnessing the kind of anomaly that was last seen between 2003 to 2007?

The Sensex then went up 6 times in those 4 years.

Now, the magnitude of returns need not be exactly same every time there is such an anomaly. For the health of banking sector and quality of corporate balance sheets also matter.

But this time I see, not one but three powerful forces pushing the valuations of bluechip stocks significantly higher over the years.

I call this phase the Bluechip Bull Run.

In my latest special report I have outlined the key rationale for investing in stocks that are best placed to ride this opportunity over 3 to 5 years.

Click here to know how they can be accessed.

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)