‘Earnings growth is going to be very important for India’

Global markets are uncertain over the timing of an expected Fed rate hike. Bloomberg TV India caught up with Binay Chandgothia, MD and portfolio manager at Principal Global Investors, to get a sense of how investors perceive India amid global volatility.

After the China rate cut last week, and the next Fed meet slated for October 27-28, global markets continue to be nervous. What is your outlook?

We do not expect the Fed to go out and announce an interest rate increase in October. We actually think they should have hiked interest rates earlier — probably in the last meeting. But given the fact that they gave themselves flexibility on watching global financial conditions and global growth indicators, we think nothing much has changed between September and October for them to hike rates now. This means a rate hike is possible sometime in December.

What is your reading of China?

With the Chinese policy makers announcing rate cuts and reduction in the reserve requirements, some of that anticipation looks positive. It is natural for investors to lock in the gains given the sharp rally. Our view on China is that growth — as it relates to the old economy, as in industrial growth — is going to remain very soft. The new economic sectors — telecom, media and internet — are where growth will come in in China over the next three-five years.

So where does that put India, which analysts say is relatively better off?

India remains in an advantageous relative position in an environment of slow growth. India is growing at about 7-7.5 per cent, which is significantly higher than what the rest of the world is growing. Soft Chinese data, especially in manufacturing and industrial activities, implies that commodity prices will remain low. In that case India, being a large net importer of commodities, will benefit.

However, in the last one year, India’s earnings growth has generally been disappointing. That has to pick up in India for investors to repose the confidence that they have shown in considering India to be the most significantly overweight market within the emerging world. So we will watch out for earnings this quarter and for outlook of earnings going forward. That is going to be very important for India.

What kind of sense are you picking up from some of the foreign fund managers when they talk about the Indian market?

I think foreign investors are cautiously optimistic on India because some of the growth that was expected earlier hasn’t materialised, especially if you look at the bottoms-up scenario on the earnings front. So they are cautious. The hope is still there that the reforms initiated over the last 12-18 months will bear some fruit in terms of higher growth. But you need to see more evidence of that before more allocations get into India.