An Overview of the Indian Stock Market and Economy

We are very positive on India. I am very happy with the reforms implemented in the country and also the high economic growth. What we are doing is focusing on small and medium cap (companies) because they tend to be a little cheaper than the large caps. The average price-to-earnings ratio in India is much higher than that in other emerging markets generally, but averages of course don't tell you the full story. At the end of the day, we have to look at individual stocks.

We have quite a few of the small and medium cap stocks in our small-cap fund. Some of these of course we would take profits on but generally speaking we have not moved our positions in India. We see a lot of value there and you have to be aware of the growth rate of these kinds of stocks. We like what we see in small and medium caps in India.

Indian markets have peaked out? No, I don't think so. We are pretty much on a bull run and these bull markets can last quite some time. Of course, there will be corrections on the way. But at the end of the day, we have to be aware of the fact that we are in a very positive economic situation in India.

How successful has the Government been on this front so far? They have been very good. Considering the problems they had, the Modi government has done a terrific job in introducing reforms as fast as possible. Trying to introduce reforms is not something that is easy. Look at Trump, he has been trying to make changes in Washington and he is facing opposition from his own party. So it is not surprising these things take longer than you would expect.

Earnings growth is still missing in India. Yes, considering the high economic growth rate in India, we will eventually see it coming through. We have seen that in the US, for example. The US is now beginning to announce better corporate earnings and that maybe a precursor for even better economic growth going forward. That's the case in India as well.

Do you think the rupee can strengthen from the current levels? Yes it can strengthen from the current levels. The RBI has been somewhat behind the curve. This is very similar to what you find in central banks around the world. The Fed has been behind the curve, didn't anticipate the big crisis that we had in the US and now they seem to be too slow in moving in the other direction. We are in a situation now in India where there is an opportunity for the rupee to get stronger.

Where do you see the rupee by the end of this year? The rupee could easily hit 60 against the US dollar. It is quite possible. Central banks in US, Europe and Japan have been expanding their balance sheets dramatically. But then if you look at the loan-to-deposit ratios of banks, it is going down. The banks are not really utilizing these funds to lend to businesses to the degree that they should be. With the reduction in the balance sheet of the central banks, we may see actually an expansion of lending from regular banks because they are going to have the wherewithal and the desire to increase their lending. We may see a completely different reaction to what everyone expects.

One thing that US investors have realized is that they are very underweight in emerging markets. Since the beginning of last year, emerging markets has outperformed the US market. This has caught the attention of investors and they are therefore, going to be probably increasing their weight in the emerging markets. India will benefit from that as well.