Carl Delfeld, who served on the executive board of the Asian Development Bank during the administration of President George H W Bush, is the head of the global advisory firm Chartwell Partners, and editor of Chartwell Advisor and the Asia Investor Intelligence newsletters.
Author of The New Global Investor, Delfeld is widely regarded as a topnotch investment advisor, and an Asian specialist helping investors and financial advisors build global portfolios.
In a recent article in Forbes magazine, Delfeld projected India as the next great bull market of the 21st century, and argued that the country has the potential of being a better investment destination than even China.
An interview with rediff India Abroad Senior Editor Suman Guha Mozumder:
You have argued that India is the world's next great bull market, and could outdo even China. Why?
We at Chartwell Partners focus on Asia. While we are interested in China, we take a balance sheet approach. We look at both China and India, at their assets and liabilities and both, of course, have great balance sheets.
We are interested in India primarily because it is a democracy with respect for property rights and due process, a strong legal system. Also, its capital markets allocate capital, we believe, more effectively than the Chinese system.
One of the reasons why we believe India has the potential to be the next great Asian bull market, comparable to what Japan was in the 1960s and early 1970s, is the fact that interest rates dropped quite sharply between 1996 and 2001 and that will fuel the Indian market just as the drop in interest rates fueled the great American bull market in the early 1980s.
Is it that simple?
There are still a number of things that we are very concerned about. The first, which goes back to my years at the ADB, is concern about infrastructure, and foreign investment that is related to infrastructure.
I still think that given the political situation there, the coalition with the Communist party, perhaps one needs to give more time to Prime Minister Manmohan Singh.
But I am surprised by this ambivalence about foreign capital. That is something you do not see in China, where foreign direct investment flows have been much greater, and investment in infrastructure in China has also been much greater.
So that issue is a liability on the Indian balance sheet.
Then, of course, I am beginning to point my criticism towards India because the government had plans to privatise some fairly large government-owned enterprises, but now they seem to be backtracking. That is kind of disturbing. I know privatisation is too emotional a word, but privatszation would bring in badly needed revenue for infrastructure and other things.
The overall market reform in India is not moving as quickly as we have hoped.
What then explains your optimism?
We watch the situation there (in India) very closely, and we are very positive. I think it is probably a generational thing, the demographics, that is why we like India.
We all know that probably 25 percent of the world's population under 30 lives in India.
Our hope is that this new generation will be more open to foreign investment and market reforms, to more capitalism and less socialism.
The fact that the US and India have a close relationship is a big plus from the US investors' point of view.
Does this view not parallel that of most investment advisors?
We take a slightly different view in the sense that while most research organizations, when they talk about India, focus on the country's service sector, especially the IT sector, for us the key sector in India is manufacturing.
It accounts for 25 percent of the GDP, and it is critical.
While agriculture is still going very slowly, and though the service sector is growing nicely and serving half the economy, the manufacturing sector is not growing as fast, it is far below potential.
If you can turn that around and grow that manufacturing sector 10 to 12 percent a year, then the story really falls into place.
You mentioned that when it comes to FDI, India is no match for China. Why do you suppose this is so?
I think the big part of it is infrastructure, like roads and ports, because capital would go where it feels most welcome, and definitely it is very welcome in China.
In India, there is this thing of 'we want the capital, but we want it on our terms'.
You do not want to give up control, and you don't want investment in many different industries.
In other words, India is open in many ways, but there is still ambivalence.
The infrastructure in terms of roads and ports is not at the level you see in say Hong Kong or Singapore or other potential investment destinations in Asia.
I would really concentrate on developing infrastructure that is expensive, and that is why rather than borrowing money from ADB, private investments would be better.
My hope is that things will open up in India, but I also feel that because of the nature of your political system, changes are going to incremental and evolutionary. But ultimately this must pick up the pace.
You speak of the nature of the political system. India, though, is a democracy, unlike China
Let me put it this way: if China wants to have this capital flow continue, it needs to have a much more transparent, organised and regularised process for approvals.
As far as India is concerned, it needs to improve the speed and consistency of approvals for foreign investment.
It does not seem to me to hold water that you say 'India is slow and bureaucratic and inconsistent because of democracy', because democracies are all over the world and they are fast.
Look at the Eastern European countries, at Singapore, at Ireland those are democratic countries, yet they think very fast. I think Ireland is a wonderful model.
India is ruled by a coalition government -- do you see that as a constraint?
Yes. This is true not just in India, but wherever you have a democratic system with coalition governments -- the perfect example being Germany.
I think one big benefit of a two-party system is that the winners have mandate, no matter how slender their electoral victory. But when you have to cobble together a coalition government with partners that are not on the same page and have same agendas, it is a recipe for gridlock.
India cannot afford to have gridlock.
That is why I feel that Prime Minister Singh does not seem to have as strong a mandate as perhaps he would like, because he has to depend on many of the coalition partners, many of whom do not agree with his agendas.
So given India is stuck with a coalition government, what should it do?
It is not easy. He (Dr Singh) has to develop a programme that has popular support -- and again, an example in current affairs is Japan, where the prime minister used the postal system privatisation as an overriding issue to go to the people and win a renewed and strengthened mandate.
Should Prime Minister Singh go to the polls, what would be the overriding issue?
If he said privatisation in infrastructure, openness to foreign investment and privatising State-owned enterprises, what would be the result of the poll? Would he win a mandate? I do not know much about politics. But I cannot possibly be more hopeful about India, and I encourage people all the time to invest there.
What recommendations do you have for US investors?
Here is another issue -- right now there are only two closed end funds for India.
There is the Morgan Stanley India Investment Fund, which I have been recommending for the last two years, but it is getting very expensive now.
And then there is the India Fund, which I do not recommend.
Also, you have 11 ADRs trading on the US stock exchanges, most of which trade at a price premium over the India Market price. So, that is another challenge.
It is very tough for me right now to tell American investors how to invest in India; in general, I tell them to be careful of the price levels and to look at short term funds.
Could you explain LSF?
Basically, in long -short fund, they invest in small and medium Indian companies and avoid the large companies that we think are too expensive right now.
Tata Motors is one company, however, we are recommending for ADRs.
The small and medium sized companies also tend to have much better values. So we are steering them towards funds that invest in small and medium sized Indian companies that have not gone up as sharply as the big IT companies, or those that get lot of publicity.
I think one of the key areas of reform would perhaps be to open up the markets more to small and medium sized companies, and also to privatise.
When I say privatise, I mean do not just take 10 or 20 percent, but put the majority of a big State-owned enterprise in private hands, make them available to global investors as well as to Indian investors.
In comparison with China, would you say India provides short term opportunities, or long term?
I think it's a long term play as far as India is concerned with its democracy, strong legal and financial system.
My guess is both are emerging markets, so you can expect some volatility -- but one of the reasons we like India more than China right now is that it has a higher probability of sustained capital appreciation or a bull market.
