It's China now, India for long term

[K.Karthik Raja]

It's China now, India for long term


February 04, 2008
At a time when foreign institutional investors (FIIs) have been
sellers, there are some like Teachers Insurance and Annuity
Association - College Retirement Equities Fund (TIAA-CREF), who are
still calm and don't feel jittery.

The company is one of the world's largest retirement systems and
leading institutional investor offering a wide range of services
spanning from insurance, retirement plans, mutual funds, institutional
asset management to real estate.

It is a mission driven organisation serving people from the academic,
medical, cultural, and research fields in the United States for nearly
90 years. TIAA � CREF's chief investment officer, Dr. P. Brett Hammond
shares his outlook on the global markets, India's long term potential
and the sectors that he likes with Priya Kansara.
Excerpts:

Were you affected by the subprime crisis?


We took a right call in case of the US subprime crisis. Near the end
of 2006, we started feeling that there was an unsustainable
residential housing bubble in the US, which could be the most
vulnerable part of subprime. We searched through our portfolio to
ensure that we didn't have securities that contain the subprime or
companies who were most exposed to the same. We got rid of them and
today we have almost 'nothing' in subprime.


Is the worst over on subprime?


It is not necessary to say that the worst is over. But, we think that
in the later half of this year, we will see some kind of bottoming out
in the housing market and we will begin to see an upturn. So, I think
some hit is still left for the first half of the year, but it will not
be as severe as in the recent times.


How will the global economy be affected?


I don't think that the global economy will be deeply affected because
the subprime crisis affects most directly financial services firms and
residential housing and has not spread so far to other sectors in the
US. What is happening is that countries all across the world including
India are facing a tailing off of economic growth. Though growth in
India will come down a bit; it will still be highly favourable as
compared to other countries.


How will the US economy fare in 2008?


Our GDP growth forecast in 2008 is about 2.2 per cent with about 1
percent or less in the first and well over 2 per cent in the second
half. We believe the chances of a recession in the US economy are less
than 50 per cent, but any serious unexpected shock could rapidly
change that picture.


What is your outlook on the global markets?


Our experience as an investor is that markets could be volatile for a
long time. For example, in 1998, markets were in free-fall, but it
recovered very quickly. Same thing was experienced in 2001, when
things were very down due to 9/11 attacks, but then, they came back
up.


On the other hand, in 1973-74, markets went down and didn't recover
for a long time. We are not in a position to say what is going to
happen. But, we continue to see volatility in the global markets.
Perceptions are very negative all over the world. A year ago, even bad
news was shrugged off, but now the good news get shrugged off and the
bad news is taken to heart.


Are you worried about the current volatility in the Indian markets?


We don't have a short term focus and our investments aren't driven by
volatility over short periods of time. We have longer time frame of
2-5 years for individual equities and more than 5 years for our
products like our insurance company's general account. We do have
mark-to-mark investments but in most cases we look at individual
securities and decide whether it will outperform over the next three
years. In any case, we believe the premium is higher in remaining
invested for a longer time rather than getting in and getting out.


Will India witness robust flow of foreign money?


Flows to Indian equities could see a small pause but the prospects for
Indian equity markets are good because growth is grounded in solid
broad-based economic fundamentals.


Do you agree with the argument of India's de-coupling with the world
market?


I do not buy the decoupling argument as a total explanation. India is
a part of global economy, so it is going to be exposed to the changes
in the global economy. It is true that India is much less exposed as
it has fewer exports as a percentage of GDP as compared to other
countries. But, that doesn't mean it has no exposure. The decoupling
question makes more sense in terms of the extent of variation and not
as a yes or no.


Corporate India's growth rate is cooling off. Your views.


Though corporate earnings growth is slowing down, it is still better
than in the US. We continue to certainly see good growth in Indian
companies, even over the long run. But, it is difficult to answer
whether that is going to happen in every year, because even US
companies do not have good growth every year.


What is your investment style?


We buy individual companies and do not make a country or sector bet.
We have sector analysts, who constantly look across wide range of
countries and try to find out which company in that particular sector
can outperform our benchmarks in the next three years. We do keep a
watch on the company and move to another company in the same sector if
the former begins to trade near fair value. At the same time, we have
to be very careful about not being overweight on a particular sector,
stock or market capitalisation.


What sectors do you prefer in India?


We have been pleased with some transportation companies in India. We
are also actively looking for some financial services (including
banking) and infrastructure companies, as we feel that some companies
in these sectors are still undervalued. But, besides these sectors, we
are pretty broadly focused and have some exposure across all sectors
in India.


What is the time frame you adopt?


We may purchase and sell securities within India from time to time as
we want to take advantage of new opportunities. But we don't try to
move in and out of India.


How do you compare India vs China?


China is very popular in terms of the place to invest and it is
growing at a double digit GDP growth. But, India is very attractive
long term play, because of the changes that are happening in the
country. Firstly, the demographics in India are favourable with nearly
half of the population under 26 years of age.


Secondly, the commitment of India towards economic growth and
infrastructure is very encouraging and looks like this will continue.
Lastly, the education system provides good support, which bodes well
for the long term with higher stream of educated people. So, we are
positive on China for the moment, but, India over the long term.