Investment Advisor: Reliance Asset Management (Singapore) Pte. Ltd.

Portfolio Manager: Dhawal  Mehta

(July 2011)


How have the Indian markets performed recently and are there any particular areas which are performing well?

Indian equity markets have been on the receiving end so far in 2011. The MSCI India index is down 9.1% YTD and ranks 18th amongst 21 emerging markets in its peer group. But June has been good with a return of +1.4% versus negative returns across most other markets. Large caps continue to do well compared to midcaps and consumer staples and healthcare are the best performing sectors.


Inflation in India has become a concern and the central bank has raised interest rates a number of times over the last year and a half to try and contain it. Are inflation levels in India a serious risk to economic growth?

In the current monetary tightening cycle that began in early 2010, the Reserve Bank of India (RBI) has raised rates on ten instances and cumulatively has increased them by 425bps. This is a long cycle and clearly for now handling inflation is a bigger priority for the RBI than managing growth. The rate impact is clearly visible in industrial production numbers with the latest figures from the Index of Industrial Production (IIP) growth decelerating to 6.3% y-o-y in April (vs. 8.8% growth in May). Credit growth too has decelerated. The impact on demand is already visible in GDP growth forecasts where consensus expectations have now been downgraded from above 9% to less than 8%. While investments have been clearly hit, domestic consumption growth continues to remain extremely strong, and because of this we believe that GDP will continue to grow at a healthy pace.

How important a role do macro-economic developments play in determining sentiment on the Indian markets?

India is a developing market and hence investments play a very important role. With capital expenditures being funded via external capital (FDI + FII) it is very important for foreign funds to continue to invest in India. Also, the cost of local capital has a significant bearing on corporate profitability. Hence macro economic developments play a major role in determining sentiment on the Indian markets.


The government is planning to announce a new manufacturing policy to help boost the share of manufacturing in India’s GDP. What opportunities do expanding the country’s manufacturing base present for investors?

The government is planning various reform initiatives in the areas of taxation, labour policies, land acquisition for projects and management of natural resources to boost India’s manufacturing capability. It is a well known fact that China has taken a lead on the manufacturing front while India is strong on the services front. India has great expertise in the engineering and auto ancillary fields and these sectors can scale up to become global sourcing hubs and provide investors the chance to participate in the process of their growth.


India is said to have a “demographic dividend” with a large proportion of its population under the age of 35. How does this translate into market potential?

A young population throws up immense opportunities for directly-related sectors, such as education, hospitality etc. Alongside this it also provides a boost for ancillary sectors like entertainment, telecommunications, fashion, luxury retailing etc. as, with a higher proportion of India’s population entering into the earnings age bracket, there is a direct impact on their purchasing and consumption and savings power which will have a significant rub-off effect on the overall growth of the economy.


India is one of the BRIC group of emerging nations which are at roughly the same level of development and all have enormous economic potential. Is there anything that sets India apart as an investment prospect from the other BRIC nations of Brazil, Russia and China?

Amongst its EM peer group, India is in an advantageous position since it has access to both natural resources and a favourable population base. It has the least dependence on exports and hence growth prospects are more sustainable and better prepared to absorb global shocks. Indian equity markets are highly diversified and the Return on Capital Employed (ROCE) of Indian companies is among the greatest within its peer group.


Massive investment is planned into infrastructure in India as the country’s population grows and urbanisation continues. How can investors benefit from these infrastructure investments either directly or indirectly?

India is currently in the midst of developing a large infrastructure space and current government budgeting sees annual spending of USD100bn in the coming years. This provides ample growth opportunities for global firms which have witnessed reduced spending in the western world. Profitability in India is also comparably higher with the Indian government assuring an Internal Rate of Returns (IRR) in excess of 16% for most large infrastructure projects.


Which sectors in the Indian economy do you see offering the best medium and long-term investment prospects?

Consumer discretionary and consumer staples offer one of the most sustainable and secular growth opportunities in India. As is the case with any developing market, the banking sector also plays a major role and provides a compelling investment opportunity. In the medium term we believe the interest rate cycle is close to peaking and hence interest rate sensitive sectors like automobiles, utilities etc. will do well.


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