FPIs moving out because India is the most expensive equity market: Benjamin Cavalli, Credit Suisse

As foreign institutional investors continue to withdraw money from the Indian stock market for the tenth consecutive month in July, Credit Suisse’s Benjamin Cavalli says FPIs are moving out as India is the most expensive market relative to other economies. “The MSCI India Index is trading at a P/E premium of ~70% versus the 10-year average of ~45%. Although the valuation premium has fallen from an all-time high of about 90%, still the historic high premium is making FPI nervous,” said Cavalli, CEO, Hong Kong Branch and Head of Wealth Management, Asia Pacific, Credit Suisse. Edited excerpts:

Can you share some insights on how your India onshore business has grown during the last two years?
We started our wealth management business in India in 2008. Credit Suisse has been staying the course through the cyclical evolution of PB Industry in India, whether it’s the Global Financial Crisis or the COVID pandemic, when other international players have exited the local market.

Over the last 2 years, our client business volume has also increased significantly by more than 4X. We have also seen double-digit growth rate in our India onshore’s net market revenues and AuM as of end Dec 2021.

All these are a result of Credit Suisse’s investments in the India onshore market.

India remains one of our top 5 strategic priority markets in Asia Pacific. It is on a growth trajectory to become the 3rd largest economy by 2030 and the 2nd largest economy by 2050 with a GDP of $44 trillion.

Credit Suisse aims to become a reference for the India entrepreneur. Our integrated global bank model has proven a key differentiator for the bank’s UHNW and entrepreneurial clients. We are able to advise our clients across the entire spectrum of services, from asset allocation of their personal wealth to executing on landmark debt and capital market transactions.

The World Bank believes that the Indian economy may grow by 7.5% this fiscal year. What are the macro indicators telling you about the economic growth outlook amid all the pressures related to inflation and geopolitical tensions?
We believe the underlying growth trajectory in India continues to be very strong, with good basis for medium-term optimism on the economy:

• Damage from the pandemic was much milder than expected.
• Housing market recovering after nearly a decade-long slowdown,
• Sturdy growth in services exports.
• Market share gains in goods exports.
• Governments, in particular provincial governments, are now able – and starting – to spend
• Tax to GDP is picking up,
• Government cash balances are more than 1% of GDP above normal,
• The constraint on their spending is now operational rather than fiscal.

We see this like a coiled spring: taxes have been collected and the spending is just starting.

Also, the normalization of inbound international travel, to nearly 1% of GDP before Covid, would be another catalyst for growth.

The only major headwind currently comes from elevated energy prices, and India’s dependence on imported energy. This may result in sustained weakness of the rupee against the US dollar.

Once the balance-of-payments adjustment is done, the medium-term outlook for India’s growth is quite strong. Both lenders and borrowers are under-leveraged, and the demographic tailwind is supportive.

The Chinese economy is showing signs of revival. How do you see China plus one strategy shaping up in the years to come? Is India going to be a big beneficiary of that in the future as well?
China Plus One is the business strategy to avoid investing only in China and diversify business into other countries. The Covid lockdowns have already seen many MNCs search for alternatives/back-ups to China, India being prominent amongst these.

Supply-chain resilience is likely to gain more importance going forward. Geographical diversification will increase in importance. Some amount of redundancy will likely be increasingly tolerated.

India has the potential to gain more “market share” in terms of FDI into Asia because of favorable demographics (younger workforce and consumer base), faster growing middle class => growing domestic consumer market; largest in Asia ex-China and a stable government.

Some aspects India needs to focus on to help catch up would be 1) infrastructure; India is ranked significantly lower than China, and 2) regulatory red tape. In the ease-of-doing-business ranking, China is at 31 and India at 63.

India has seen heavy foreign outflows of over Rs 2.2 lakh crore so far in the calendar year 2022. When do you see a reversal happening? How expensive do you think the Indian equity market right now is vis-a-vis other emerging markets?
India is the most expensive market relative to other economies and hence FPIs are reallocating capital elsewhere. The MSCI India Index is trading at a P/E premium of ~70% versus the 10-year average of ~45%. Although the valuation premium has fallen from an all-time high of about 90%, still the historic high premium is making FPI nervous.

Overall, the valuation froth in Indian equities has settled and the absolute valuation is more or less in line with the long term average.

Rise in energy prices also hurts India disproportionately and hence in the rising oil price environment it is difficult to predict when the flows will abate. The other problem for FPI is potential weakness in the INR given the negative balance of payment situation this year. So far, the RBI and the government have managed INR well with slow depreciation. However, if the commodity prices, especially oil, remain elevated, we may see more trouble for the currency.

However, in the medium to long term perspective, the Indian economy could do well and hence in our view the outflows should abate once the oil prices start to stabilize.

We are convinced that India is a good structural investment opportunity and over the past few years the confidence in India has even grown considering the reforms and structural changes that India has seen.

There could be more pain in the near term if global growth plummets, however our team believes the economic pain for India will be limited given strength in India’s banking system after the clean up and improved government finances.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)