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If you get GDP growth of 5%, 15% EPS growth likely: Raj Sharma, Merrill Lynch

For the first time, I see risk taking. People want to make money and wealth creation is not a bad word. When I was growing up in India in the 70s, it was not fashionable to be a businessman and now it is a cool thing to be a businessman, says Raj Sharma, Managing Director, Private Wealth Advisor, Merrill Lynch.

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Last Updated: Feb 14, 2020, 03.58 PM IST
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Raj Sharma, Merrill Lynch-1200
The investing community in India is a bit worried about the slowdown which we are grappling with and whether the government efforts are enough or not. A large part of the Indian markets are still struggling and are away from the all-time highs unlike the benchmarks. How are you analysing the Indian markets from your vantage point?
The Indian markets are part of the global economy and there have been some negative waves for the past year or so. You have had the trade war which certainly affected China a great deal, but China is so big that a slow China affects India and other emerging markets.

The other thing you have had recently is the coronavirus outbreak which has also set back China and the effects on India are also quite pronounced. In the short term, there are negative effects. The trade war appears to have settled down. With interest rates coming down and some green shoots emerging in the economy, I think you are in for better times it needs patience on the part of industries.

You have seen the emerging market landscape for a very long time based out of the US. Can you say what we used to be a couple of decades back and where we are right now? What is the outlook from here on if one really takes a portfolio view of three to five years and beyond? Would equities remain the top performing asset class?
I think so because interest rates globally have come down and so bonds are not as attractive for a long term investor. If you are in the US, a 10-year bond is giving you about 1.6%, in Europe it is negative, and India has also come down substantially. I know people have been complaining about their fixed deposits coming down, so my general sense is equities will be the favoured asset class and the key thing with equities is long term investing.

I tell my clients do not put money in the market unless you have 3-5 years of minimum view if not more and then you can reap the rewards of a good economy.

In the last two years, Indian markets have gone through a decent bout of correction. The credit markets were also destabilised for reasons of their own. How are you analysing the steps which the government, the policy makers, RBI, have taken to help stabilise the market?
The economic measures which have been taken have been pro-business -- the cut in corporate tax rates, the regulations, the ease of doing business. The key thing is India is operating at a globally competitive market. We are not the only one. Every country is looking for foreign investment but in general, many of the indicators are looking much better today than ever before. I think we are within a secular growth rate for the Indian economy.

How are you analysing the way China issues are panning out? First it was the slowdown induced from the trade war with US, now it is a slowdown induced by shutdowns because of the Wuhan virus. That continues to remain a big headwind for the global economy. How serious is it in your view?
It is serious. The coronavirus outbreak is serious though it appears to be waning a bit. The markets are telling you not to worry. The markets sometimes are early indicators of whether this is going to have a major impact. Hopefully, within a few weeks or months, this virus will go away to a large extent. China in addition to the trade war has been hit by a double whammy but on the monetary side, they have lowered the cost of money, have pumped in a lot of additional reserves and that is going to help their overall economy. The liquidity picture in China is incredible. Not just in China, over the past six months, we have had 72 interest rate cuts around the world. No country wants a recession.

How do you analyse the valuations of Indian equities? Some people call it polarised because only a clutch of stocks are doing well, while broader markets are still slumbering. What is your thought?
My general view is if you get good GDP growth, that will translate to good earnings per share growth of Indian companies. Typically, it is a factor of three. If you get GDP growth of 5%, you are likely to get about 15% EPS growth. India is not cheap by any measure if you look at present day valuation, but look at potential growth prospects.

If you can say give a reasonable growth rate for the next three years or five years, then the markets look quite appealing. For a long term investor, I advise my clients that when they are investing in emerging markets, they cannot hope for a short-term hit. You make it lucky once in a while but the key thing is to look at it as a durable asset class.

Do you think India can really benefit out of what is happening in China because there is talk of a lot of manufacturing capabilities moving out of China towards India. How successful are we in grabbing that opportunity? What are your thoughts on this?
China is the manufacturing floor of the entire world. It is amazing how much is made in China. So, certainly companies in the west want to diversify their holdings. You know their supply chain and also not just in China but also other countries like Vietnam, Indonesia are benefiting. India has a unique opportunity to show off what India can do for manufacturing to the western world.

When you migrated to US from India 30 years ago, the Nifty was not there. Sensex was just being set up. Where do you think our capital markets have the potential to go in the next 30 years? Can we grow at the same pace -- 14-15% compounding average?
I would not be surprised. The GDP growth is a combination of population growth and productivity growth. India has got probably the youngest population of the world. With 65% of the people being under 35, in the number of people using cell phones, India is ahead of the west. Indian consumers are more savvy about social networking and cellphone use and I am incredibly impressed by that.

I think they can leapfrog development. It does not have to go at the same pace. The other thing is India’s value added services are going up. A lot of research is being done in India and for the first time risk taking people want to make money and wealth creation is not a bad word. When I was growing up in the 70s, it was not fashionable to be a businessman and now it is a cool thing to be a businessman.

Well that is correct. Our Indian entire ecosystem for startups and entrepreneurs is a very buzzing one as well, apart from of course the stock market.
I think the future of India lies with the young people in India and if you believe them, we will have a very bright future.

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