Vincent Lagger, co-fund manager of JB Chindonesia Fund at Zurich-based manager Swiss & Global Asset Management, tells WealthBriefing why India makes a surer bet than China for private investors.
WB: Why are you bullish on India?
VL: The fundamentals are strong. While
western economies digest the prospect of a double dip recession and have
concerns over global growth, India’s gross domestic product is expected to grow by 7 to 7.5 per cent during
the fiscal year ending April 2012 as a result of demographic trends, robust
domestic demand and a sound banking system. The economy was resilient during the 2008 recession and has continued to grow at a healthy rate. India will become more
reliant on domestic growth drivers compared to previous years, and its growing
middle class should drive demand.
WB: How is a growth in household wealth affecting the Indian economy?
prospects of the rural economy keep improving, thanks to labour reforms and
rising farmers’ incomes. While local needs are huge, production remains
fragmented, restricted by low investment and logistic issues. However, crop
diversification, irrigation, seed technology and government minimum prices have
already beneficially affected farming yields over the last few years. As a
result, purchasing power is passed down to farmers and the consumption boom
experienced outside urban areas are already supporting many industries: for instance
demand for cars and motorcycles keeps booming as affordability improves and
sensitivity to interest rate hikes remains very low.
WB: Would you favour investing in India over China?
economists agree that India is more advanced than China when it comes to
economic reforms. India’s capital markets are gradually opening, partly
motivated by the need to develop bond markets and facilitate huge
infrastructure financing needs. India boasts a private-sector
banking system where market forces, not government intervention, fix the price
of money and allocate capital. Thus, credit can be routed to consumers instead
of supporting state-owned enterprises and government projects alone.
WB: What about the risks of inflation to the Indian economy?
the last few months, cyclical headwinds intensified subjecting the Indian
economy to stubbornly high inflation and a liquidity squeeze. While inflation
fever typically finds its roots in food and fuel price surges, the poor state
of the local infrastructure and resulting high logistic costs compound the
problem further. The absence of a prolonged slowdown during 2009 left the
manufacturing sector with increasing difficulties in sourcing cheap labour,
further adding to inflationary pressures. Aware of the overheating risks
threatening economic stability, the Reserve Bank of India correctly shifted its
focus from a pro-growth to an anti-inflation policy. Accelerating monetary
tightening dramatically increased the cost of funding for banks and businesses
but achieved the much needed impact on India’s economy: investment levels
reduced, credit demand is finally moderating, and along with it, overall
economic activity is falling to a healthier level..
WB: What are the long-term prospects for India?
times of global commodity volatility, India is of course exposed both on the
public and private front: careful monitoring is required as government budgets
could be squeezed through rising subsidy costs, and households could suffer
from soaring living costs.
the concerns for the global economy, India’s fundamentals remain strong and are
backed by the robust profitability of Indian corporates, which is reflected in
the valuation premium of the Indian stock market. However at around 13.7x next
fiscal year earnings (post the current global sell-off), local indices are
attractively valued compared to historic levels. Inflation pressures still
represent a challenge, but the foundations are being laid everyday by millions
of entrepreneurs ready to tap into what is expected to become one of the
largest market places in the world. Free-market democracy and the entrepreneurial
spirit of its population will help India’s future growth.