Q&A with Gary Dugan, chief investment officer, Asia & Middle East, RBS Wealth Division
Indian stocks may not repeat the performance in 2012 this year too, but investors can expect 10-15% returns driven by economic reforms, said Gary Dugan, chief investment officer, Asia & Middle East, RBS Wealth Division. In an interview with Jitendra Kumar Gupta, Dugan spoke about what to expect from Indian, US and European markets in 2013. Edited Excerpts:
What is driving foreign investor inflows into India?
There are two things that are pushing the Indian markets. One is the continuous policy reforms, which came as a surprise, and second, the improving confidence about the global economy that growth is going to be strong and emerging markets and the economies are going to lead the way. The world is still awash with a lot of cash on account of the quantitative easing by the global central banks. A lot of investors are shifting or increasing their stake towards risky assets. They are coming out of bonds or safe assets to invest in equities. And, among the equities the emerging markets and within them India is one of the preferred markets.
Can Indian stocks repeat the performance of 2012 this year too?
One thing is clear to us that this year the returns are not going to be 25% in India as we have seen in the year 2012. However, one can expect another 10-15% return from the market backed by reforms which will lead to further rerating of Indian equity. Secondly, although the relative valuations are higher at these levels India can sustain given its higher return on equity. The risk is not in the valuations and possibility of foreign outflows. The biggest risk is politics and a setback to reforms. But in general there is scope for further capital flow from the developed markets as the risk appetite is increasing.
Are expectations of an earnings revival in Indian companies overdone?
We do not need a 30% growth in earnings for a further rise in the markets from the current levels. Even a 10-15% growth in earnings is enough and possible with the higher GDP growth. We have already seen some of the key economic numbers signaling a bottom suggesting a scope for the improvement in the earnings. Further a cut in interest rates and lower reserve requirements for the banks will help in revival of earnings. Importantly, this rally is devoid of involvement of the domestic investors. And I think they will come back and that will reinforce the rally.
So what is the bet on: growth or recovery?
I think one should focus on recovery. One should bet on recovery or cyclical more compared to growth at this point in time. Indian economy needs to look different; it needs to invest rather than consuming more. The emphasis of growth will shift more towards the investments, which will revive housing, capital goods, financial sector or broadly the capex led sector. The portfolio should be tilted more towards the cyclical.
Are investors ignoring the possible risks to the US and European economies?
There is a risk to recovery in the US, but I think this recovery is for the real. The risk comes from the fact that the large part of the recovery has come from the housing market. Industrialists’ confidence is better but it is still not high. I think the biggest risk this year is the US' constant battle with fiscal deficit. US consumers and industrialists are still hesitant to spend money because there are concerns over the uncertainty about the possibility of higher taxes. In Europe as well the situation is better compared to what it was a year ago. I think what the international investors have overlooked is the marked improvement in the situation in the Spain, Portugal, Italy and to some extent in Greece.
Can global equity markets ask another 12 months from these two (US and Europe) regions for stability?
The market is somehow forgiving some of the things that have been talked about. It is not certain whether the US can deliver better growth, but we are hopeful that the deficit issues will be resolved. Then, an improvement in the housing markets and the equity market will see further phase of growth. This should be the case at least for the remaining months of the current year.
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