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Long-term India story is very much intact: Jayesh Sheth

Source: IRIS (27 August 2009)

Long-term India story is very much intact: Jayesh Sheth
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Jayesh Sheth, managing director, KC Securities has over 28 years of experience in capital markets. He has served as a BSE board member for 6 years and as the honorary treasurer for 3 years. Kantilal Chhaganlal Securities (KC Securities) established in 1954 is a well known wealth management firm amongst the financial community. In an exclusive interview with Poonam Chopra of, he provided insights into the India growth story, the state of the economy and what will it take for the country to grow strongly and sustainably in the future.

> Please share with us your long term view on the investment opportunity that is presented by the Indian stock markets.
The long term India story is very much intact. India continues to be one of the fastest growing major economies in the world. The growth is expected to return to 8% plus levels by 2011. This combined with the fact that global economy will likely remain subdued for next few years will make the Indian markets even more attractive from a relative viewpoint. As Indian investors mature and more and more people become part of the formal economy, investment in equity markets as a saving instrument will increase manifold. I believe the next five years will be the best ever in terms of equity returns for the investors.

> What is you view on the Indian economy? Over the five to ten years` perspective, what are the challenges that we face and how do you see India performing?
There are several challenges that Indian economy faces in the immediate future. The first and foremost is fiscal deficit. The combined deficit of centre and states will touch 13% of GDP in FY10 after being 11% in FY09. These kinds of deficit numbers are unsustainable in the medium term. The more worrisome point is that large populist measures like NREGA and food subsidies are making the deficit structural in nature. If fiscal situation doesn`t improve there is always a risk of rating downgrade by external rating agencies.

Then there is the problem of inflation. I believe that from fourth quarter of FY10, inflation is going to make a big return which could force central banks to hike interest rates quickly. That could nip the nascent economic recovery in the bud.

From a longer term perspective, India remains one of the most dynamic investment destinations in the world. However, the country requires major economic reforms to sustain those kinds of growth rates and that would require a strong political will. We have a history of great policy makers and grandiose plans. But, we have lagged behind as we lack in execution skills. I think sustained economic growth is contingent on improved delivery mechanisms, judicial reforms & improvements in healthcare and education systems. We have missed the bus several times before. If there was ever a time for next generation of reforms, it is now. Prime Minister`s office has been making the right noises about these issues. That`s something one needs to watch very carefully.

> What is different in this current stock market rally as compared to the previous ones?
This rally started in mid-March when the global equity markets were grossly oversold. The rally has been led by positive news flow emerging from various sectors of economy. The formation of a stable government at the centre added to the positive momentum.

Like this rally, the previous bull market rally in 2007 was also driven by global liquidity. We have seen an inflow of USD 8 billion of foreign money in last six months. But, during last rally there was no valuation comfort as the markets were trading above their ten year average price earnings ratios. This time the rally has brought us back to mean valuations from grossly oversold levels. As business cycle turns around, there is optimism about future earnings growth. Also, several large corporates have raised money to repair their balance sheets which will help them sustain the growth momentum.

> How much of a correction do you foresee for the Indian stock markets?
I am not looking at a major correction in Indian stock markets. There may be a 5-10% correction - inline with any global dip, but that will be an opportunity to buy.

> Which sectors are you buoyant on, both on a global basis as well as in India in the long term?
India is going to see huge capital spending to improve its infrastructure. Almost USD 1 trillion are going to be spent in next ten years on this space. For investors, there are huge opportunities in the area of power, roads, ports and railways. Also, as the number of people in the middle class increases, there will be a huge growth in consumption space. Education, travel, tourism, Hhalthcare, retail and real estate are some sectors that will benefit from the increase in discretionary incomes.

As global economy revives, industrial commodities and oil should recover although bull market in those could take some time.

> While investing in stocks, which factors would you give the highest weightage? Is there any advice you would like to give to retail investors on how to go about investing in stocks?
Investors should be very clear about their investment goals before they put money in equity markets. It is important to understand one`s investment objective, time frame of investment and risk appetite. While picking specific stocks, it is important to understand the economic growth prospects of the country and the sectors that are likely to do well. Then, one needs to identify the best companies in each of the chosen sectors.

History tells us that returns in equity markets occur in lumps. There are period of high positive returns followed by periods of negative returns. Timing these periods accurately is a very difficult task even for professionals. Most retail investors normally come in at the peak of the bull market and they end up losing money. They stay away for a long time and then the story repeats. Hence retail investors should not attempt to time the markets. The best way is to regularly channel a certain percentage of the savings into the stock market. That way they can build a long term portfolio which is in sync with their investment objectives. One way to do it is through systematic investment plans provided by various market participants.

> What is influencing the success and returns of today`s commodities markets?
China is the single biggest factor determining the price trend for global commodities. China seems to have an insatiable demand for industrial commodities. There is still huge infrastructure capex that is going on in China and that has led to a sharp pullback in commodity prices since the beginning of the year. Also, it seems that China wants to shift some of their huge forex reserves from dollar into commodities. I believe that is very prudent form a risk management perspective. All this makes me very optimistic about commodities as an asset class and I see a sustained bull market in commodities in the years to come.

> According to you, which commodities will have good investment opportunities in 2009-10 - gold, oil, industrial metals, agro commodities?
Agro commodities should quite well going forward. The demand for food is increasing due to rising incomes, changes in life styles and rising population. This increase in demand is also putting pressure to increase the productivity of agricultural land. Hence crop protection commodities should also do well.

Industrial metals demand will depend on the pace of global economic recovery and the sustainability of demand from China. Industrial metals have rallied almost 50-80% since the beginning of this year. Near term the upside might be capped although they are still attractive from a longer term perspective.

Gold was been looked upon as a hedge from the near collapse of the global financial system. Ever since normality has returned to financial markets, gold has lost some of its sheen. The industrial demand for silver has picked up and it might outperform gold in the medium term.

> On a lighter note, your favorite books/ personalities that have influenced you the most?
At present, I am reading `False Economy` by Alan Beattie. My favourite books include - `The world is Flat` by Thomas L. Friedman and `Fooled by Randomness` by Nassim Taleb. I am deeply influenced by N.R. Narayana Murthy, George Soros and Mohammed Younus of Grameen Bank.

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