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'Indian market is very expensive'
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July 07, 2006

Slim Feriani, MD and CIO of Progressive Asset Management, believes that India is more expensive than other emerging markets but it is a strong economic and earnings growth story.

He further adds that India corrected by 30%, more than other emerging markets. He also says that strong corporate earnings could bring more inflows from sidelines.

Feriani favours India's growth and structural changes. He feels that valuations, fiscal and external positions are a cause of concern for Indian markets

Excerpts with CNBC-TV18's exclusive interview with Slim Feriani:

How have you read the pullback in markets such as India and what is the call on it now?

Generally speaking, the pullback was quite sharp. For emerging markets, the MSCI benchmark that we look at from the recent peak in early May to the rough one in mid June, the correction was about 25%. That was a severe correction but it was healthy given how stretched the valuations were towards April end.

India was among those markets that did have a pretty strong run for the last couple of years including this year until the end of April.

India corrected a bit more than the aggregate emerging market correction. India corrected a bit over 30% on the MSCI benchmark and what happened was that the BRICs market corrected a bit more than the aggregate because they all went up a bit more.

In India, we have seen quite a run as markets have gone up by double digits and India has actually gone up by 20% in the last ten days or so. So we are seeing that investors are coming back into these markets.

Is this coming back for real or will we see a bout of selling again?

Generally speaking, in the case of emerging markets, we think that it is happening a bit too quickly again and that is reflective of the liquidity that is sitting out there globally, waiting to get into emerging markets for the long-term.

We hope that some of that money is certainly long-term but one of the reasons for this recent correction is really the hot liquidity, which left as soon as there were signs of correction.

Regarding lot of money sitting out there waiting to come into emerging markets, what can keep them away and where else can they go and what can suddenly look attractive?

We will have to think that emerging markets are the most compelling story for the next couple of years. But India, we think, is the most expensive among emerging markets and so we do not believe that most of that money should go into India because at the end of the day, valuation is key and Indian market is very expensive.

So would you be looking at the current quarter numbers very closely when India starts reporting these numbers after July 10-11?

Surely that is quite important because growth is what India is all about. People are buying India as 'the best growth story' in emerging markets vis-�-vis more than China. It is not only an economic growth story but also an earnings growth story.

Therefore the earnings growth numbers will be important and as long as companies meet their forecast and the guidance for better numbers, it would add fuel to fire and would bring some of the money sitting on the sidelines back into the Indian markets and global emerging markets.

How much money have you invested in India at this point and in terms of allocation, have you cut it down a bit?

We did cut it down slightly but now again it is a relative fund, which means that we need to beat the emerging markets' benchmark and we are underweight on India and it accounts to about 6% of the global emerging market benchmark.

We are positioned at slightly less than 5%, now that it is not such a significant underweight, which is reflective of the fact that we like two things in India, one is the growth story and the other is the structural change happening. But what we don't like is the valuation and the quality of this sovereign balance sheet.

The Indian sovereign balance sheets do not look healthy at all, in terms of current account deficit and fiscal deficit. Those things do worry people and that is why we are not putting lot of money into India, although we could put lot more if we liked valuations and if we did feel comfortable with sovereign balance sheets.

So you like the growth story but you think it is overvalued and you are also concerned about the fiscal situation in the country, is that right?

Correct, it is fiscal and external situation and current account deficit also. The countries that do worry people currently are India, Hungary, Turkey and South Africa. The valuations are quite stretched; the average forward P/E for India is over 15-16 times while the average for emerging markets is around 10 times and so that is 50% premium.

Although we do understand the growth story and structural change, but it is a bit too much to pay for that growth. But that is what people are paying now and that is the kind of money going into India. A lot of it is the US pension money so the good sign about it is that it is long-term, healthy money. But it is the hot money that worries people and that is the one that exits the door quite quickly.

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