Kitted out with a business-friendly new prime minister and a frisky economy, India is hoping to grab a bigger portion of the big money floating around the world, desperately seeking returns.
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Mumbai-based investments firm Kotak Mahindra Asset Management for one doesn’t cavil at wooing institutional investors in wee Israel too, brandishing, instead of flowers, India’s welcome mat, high interest rates and stable democracy.
In Israel, like in the United States and Europe, equities are high as the sky, interest rates are low as dirt, and Israeli investors are as nervous as Americans and Europeans about returns. They’re developing acute vertigo on the markets and are eyeing some pretty unconventional venues.
Indian shares are probably not the answer, at least in the near term – like Western equities, they’ve also been rising mightily: The CNX Nifty, also known as the "Nifty Fifty," the main index tracking Indian equities, has been trending up since the start of 2012 and is at almost peak levels.
But Indian interest rates are among the highest in the emerging world, says Lakshmi Iyer, 38, the globe-trotting chief investment officer (debt) and head of products at Kotak Mahindra Asset Management, who’s marketing the fixed-income “India investments story” around the world, in a special interview with Haaretz.
“India’s economic growth is likely to be at about 7.4% this financial year (2015),” says Iyer, adding, “However, long-term allocation to Indian equities also could be meritorious, depending on one’s risk appetite.”
Visiting Tel Aviv, Iyer had her work cut out for her. Some Israeli investors, not least among them Moti Zisser, got burned in India before, chiefly by losing money on the real estate market. But at least one venue she managed to impress during her lightning two-day visit this week was Psagot, the biggest investments-management house in Israel.
“The Indian story is indeed interesting,” nods Shlomi Sheffer, Psagot spokesman, noting the robust rate of economic growth in India and its efforts to encourage business. Psagot, which only manages investments and has no proprietary portfolio, has indeed marked it as interesting for investments in the sphere of emerging markets, Sheffer confirms.
Boom and monsoon
Iyer doesn’t handle equities, which is just as well given the boom in Indian stocks and resultant fear of heights on the markets. “After the gains on the market there, the risk-reward ratio in Indian equities doesn’t look amazing,” remarks Elah Alkalay of Tel Aviv-based IBI Investment House.
But that doesn’t matter to Iyer, who is on an international road show for Indian fixed-income: investment in bonds, which she would very much like global investors to handle through Mumbai-based Kotak, one of the top 10 asset managers in India.
In 2014 Indian economy grew by about 6.9%, according to India’s Statistics Ministry (it has one!), though irregularities in weather patterns, including a delay in the monsoon season, hurt the nation’s agriculture sector.
Yes, the Chinese economy grew at an even brisker 7.4% in 2014, based on official Beijing figures – not that the investing world necessarily accepts Chinese stats at face value.
But first of all, Chinese growth has been slowing and that showing was its lowest rate of growth since 1990. Secondly, while India itself projects growth of 7.4% this year (after changing the way it calculates its gross domestic product), the International Monetary Fund foresees Chinese growth slowing to 6.8% in 2015.
Thirdly, China is rather more ambivalent about FDI (foreign direct investment) than India, which wants it. Very much. In May 2014 Delhi even set a quota of $81 billion for foreign investment in Indian infrastructure (government and corporate) bonds, including key industries such as the railroads and defense industry. It’s just (roughly) $10 billion short of that target, says Iyer.
While on the subject of emerging giants as a diversification option, there’s always Brazil. But although interest rates there are stratospheric, with the benchmark Selic rate rising to 12.25% in January, the economy is expected to stay stagnant this year. Not so India.
Indian economic growth is expected to near 8% in fiscal year 2016, Kotak estimates, led by an anticipated pick-up in the investment cycle. Much hope rides on Prime Minister Narendra Modi, who as chief minister of Gujarat (a state in Western India) from 2000 to 2014, led it to prosperity.
Modi is widely credited with driving the high economic growth in Gujarat: Under his stewardship, the state achieved a compound annual growth rate of 9.72% from 2005 to 2013 – well beyond India’s average.
The premise is that as India’s 15th prime minister, Modi could potentially translate his model for that province to the rest of the country. He is also openly friendly to the idea of closer business ties with Israel.
Newfound confidence in the rupee
Israeli institutional investors have evinced some, but not much, interest in the India fixed income story, with investments through Kotak amounting to some tens of millions of dollars, Iyer says, though she points out that total allocations could be far greater.
That picayune amount begs two thoughts. One is that Israeli investment in India could grow, a lot, if the local institutional investors decide it’s an attractive target, for all India’s notorious corruption, rickety infrastructure and other impediments to business.
The other is why Iyer, who carries her road show to places like the capitals of Europe, Singapore, Dubai and Hong Kong, would trouble herself to visit tiny Israel with its tiny market. Because, she says simply, there is money for investment in Israel.
There’s also the question of why Israelis would seek their financial fortune in India, which would be quite the switch from their usual venues beyond the borders. It seems, judging by the reception Iyer received here, that they’re game to at least think about it.
“Investors seem a lot more confident about the future prospects of the Indian rupee as a currency than they were a year back,” Iyer explains. “That could also mean they have become more receptive to investments in India – both fixed income and equities.”
“Our interest rates are among the highest in the world,” Iyer says. Note that for the merry month of March, over here, the Bank of Israel lowered its rate to 0.1% and fixed-income rates are in the toilet. The benchmark repos rate in India is currently at 7.75%, with a visibly lower consumer inflation) which is at 5.1% currently, there is a case to look at lower interest rates in India in the near to medium term.
One is reminded of how in 2007, seeking exotica and returns, some Israeli investment managers hared for Iceland government bonds, yields on which had climbed to 14% and beyond. They were counting on Iceland not defaulting – “Countries don’t declare bankruptcy,” one investments solicitor memorably told this reporter at the time. Yes, they do, and Iceland – whose economy had perilously overheated, and relied way too much on the banking sector – came very close to that, with almost 90% of the nation’s banking sector collapsing in October 2008.
In 2012, market animals were pacing nervously at the prospect of an Indian default as the rupee crashed. But that was then. This is now. India’s external debt to GDP is low, Iyer points out, and its fiscal deficit is almost entirely funded by domestic investors. And with Modi and his reputation for clean government and friendliness to business at the helm, the rupee and hopes are riding high.