Biggest Indian Fund Manager Says Worst Over for Flows

Prashant Jain, chief investment officer at India’s biggest money manager, said the nation may have seen the worst of capital outflows as the rupee stabilizes and rising exports aid corporate earnings.

Overseas funds have bought a net $2.1 billion of domestic shares this month, the first monthly net inflows since May, after central bank Governor Raghuram Rajan announced plans to boost the currency when he took charge on Sept. 4 and the U.S. Federal Reserve decided to maintain monetary stimulus. Inflows helped the rupee rebound 10 percent from a record low of 68.845 per dollar last month and the S&P BSE Sensex to jump 8 percent from its lowest level in a year on Aug. 21.

“The worst of the economic pressures are behind us, and in six months to a year from today we should be in a much better situation,” Jain, who manages $17 billion at HDFC Asset Management Co., said in an interview to Bloomberg TV India.

Jain is betting prospects of improving corporate earnings will lure foreign investors who withdrew $12.6 billion from local stocks and bonds in the last three months amid the weakest economic growth in a decade and a record current-account deficit. Standard & Poor’s said this month there is more than a one-in-three chance the nation will lose its investment-grade rating within two years, while Pacific Investment Management Co. sees a “large” chance of a cut in as little as 12 months.

Overseas Demand

India’s exports rose 13 percent in August from a year ago, the most since October 2001, and imports dropped 0.7 percent, government data showed Sept. 10. Shipments were aided by a currency that is still 13 percent weaker than its five-year average, and rising demand from developed nations.

Growth in the U.S. beat estimates in the second quarter, while the euro-area economy expanded 0.3 percent in the three months ended June from the previous quarter, exiting a record-long recession. The two regions took in 29 percent of India’s exports in June, Commerce Ministry data show.

The current-account deficit may not worsen because “the currency depreciation is making exports more competitive and imports more expensive,” said Jain. The gap widened to $21.77 billion in the three months ended June from $18.08 billion in the previous quarter, data released after trading ended showed. The median estimate in a Bloomberg survey was $23 billion.

India’s $1.8 trillion economy may grow 5.5 percent in the year to March 2014, versus 5 percent in the previous 12-month period, the weakest pace since 2003, according to central bank estimates.

Credit Agencies

PIMCO is more cautious amid concern there will be a sovereign downgrade, while HSBC Holdings Plc sees expansion slowing to 4 percent this fiscal year.

“Although an outright credit default remains unlikely, the chance of a sovereign downgrade by one of the major credit agencies is large in the next 12-18 months,” Roland Mieth, senior vice president of emerging markets at PIMCO Asia Pte, a unit of the company that runs the world’s biggest bond fund, said in an interview in Singapore on Sept. 16. “In the near term, we are more cautious on India.”

Bank of America Corp. last month reduced its forecast for earnings per share for the 30 Sensex companies by 3.4 percent to 1,260 rupees for the year to March, joining brokerages from Goldman Sachs Group Inc. to Deutsche Bank AG that have cut their profit growth estimates for the biggest Indian companies.

‘Negative Choices’

The prospect of higher interest rates is adding to risks for lenders. The S&P BSE Bankex Index sank the most in four years intraday on Sept. 20 after Governor Rajan unexpectedly raised the repurchase rate in his first review to fight price pressures. The gauge slumped 25 percent from its all-time high on May 16 amid rising defaults and slowing loan growth.

Rajan may add to the increase after specifying he will use consumer-price inflation as the main guide for monetary policy for the first time, seven of 10 analysts said in a Bloomberg survey. India’s consumer gauge rose 9.52 percent in August from a year earlier, the fastest pace in a basket of 17 Asia-Pacific economies tracked by Bloomberg.

“India is on our negative choices now,” Andrew Freris, chief investment adviser for Asia at BNP Paribas Wealth Management, said in an interview to Bloomberg TV India on Sept. 27. “The clear writing on the wall is that the Reserve Bank will increase interest rates to cap inflation and to support the exchange rate.”

Retail Loans

Jain said he’s picking banks that get the bulk for their funds from the public over those that depend on deposits from companies, as a way to cut exposure to lenders with bad debts. Soured loans in the banking system rose to 3.92 percent of total lending as of June 30, a five-year high, from 3.4 percent at the end of March, according to central bank data.

“The divide is greater between the corporate banks and the retail banks as the fear of non-performing assets on the retail side is not there,” Jain, 45, said.

Retail loans make up more than half of outstanding loans at HDFC Bank Ltd., according to data on the bank’s website. The lender, among the top 10 holdings of the Top 200 fund, has lost 10 percent this year. At Yes Bank Ltd. such loans account for more than 17 percent of the lender’s total debt, filings show. The bank’s stock has slumped 31 percent in 2013.

Jain has added Axis Bank Ltd., IndusInd Bank Ltd. as of Aug. 31, according to data compiled by Bloomberg. He’s also increased his holding of Wipro Ltd. and ITC Ltd., data show.

‘Directly Benefit’

Profit growth “will improve from here” as about half the companies on the Sensex “will directly benefit” from a weaker currency, as do those with overseas operations such as Tata Motors Ltd., owner of Jaguar Land Rover, said Jain. Five of the best performers on the 30-stock gauge this year are companies that get at least 70 percent of their revenue abroad. Earnings “will be better than the consensus,” he said.

HDFC Top 200, India’s largest stock fund, last month added to its holdings in Reliance Industries Ltd., which accounts for 14 percent of the nation’s exports, Sesa Goa Ltd., which sells iron ore overseas, and Bharti Airtel Ltd., the mobile-phone company with operations in 17 African countries, data compiled by Bloomberg show. The fund has beaten 81 percent of its peers over the past five years, the data show.

Lenders, among the biggest losers on the Sensex this year, accounted for 20 percent of the Top 200’s 98 billion rupees in assets on Aug. 31. Software companies, which get more than half their revenue from abroad, made up 17 percent, the data show.

Overseas investors have been net sellers of Indian stocks in just three of the past 20 years, data from the regulator’s website going back to 1993 show. Inflows reached a record $29.3 billion in 2010, making the Sensex the top performer among the world’s 10 biggest markets that year. The largest-ever outflow in 2008, during the global financial crisis, led to the biggest annual slump in the gauge of 52 percent.

“Foreigners have a good understanding of the prospects of this economy and how this country goes through its cycles,” Jain said. “We are optimistic.”