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Home > Business > Special



'Fair value for Sensex is at 8500'

May 22, 2006

Has last week and today's huge fall made Indian equities more attractive? How do they stack up against regional peers? Hans Goetti, Director at Citigroup Private Bank believes that the fair value for the Sensex is at about 8500 and that Citigroup will re-enter India at Sensex level of 8500.

Goetti is most underweight on auto, consumer durables and commodity related sectors. He is overweight on banks, IT and telecom. SBI remains his top banking pick.

He says that India remains attractive and the economy is strong. Strong loan growth, credit creation is seen, he says.
Although metals have got hammered, Goetti is not negative on metals. He believes that the long term commodity cycle is intact.

Excerpts from CNBC - TV18's exclusive interview with Hans Goetti:

Last time you said that you would be looking at developed markets and give developing markets a bit of a rest because you expected a correction. Now the correction has come, would you come back?

The best parallel that we can draw is between October 2005 and now because the causes of the decline in the emerging markets are almost exactly the same. In October 2005, the market consensus was that Fed was downgrading interest rates and then the consensus shifted to the view that Fed had more work to do. Exactly the same thing has happened again.

If one looks at the magnitude of the decline that was there then, it was about 10 per cent of emerging markets overall and around 14 per cent for the Indian market. This is what we have had so far. This time around, valuations in India are higher than they were at that time.

In fact, as a house, we still have a fair value for India at about 8500 on the Sensex. This is not a price target, but it gives you a little bit of a guidepost. Markets can trade at a fair value for a long time, but it gives you a little bit of an indication of where we are headed. What I would like to see here is a stabilization, if we have to consider going back in.

Before the correction, several foreign brokerages had gone underweight on India. At around 8500 levels, would you indeed come back to this market?

At 8500, we would look at the market as very attractive, because a fair value target is there. India remains attractive. This whole sell-off has not much to do with India itself as the Indian economy is doing well and you still have a very long growth, credit creation in the banking system and liquidity in assets.

It is more of a psychological thing and of course there are margin calls and everything that are associated with it. That is why I am saying that I would like to see a little bit of stabilization before I go and see what value is there.

What do you think is the primary problem that is pinning this market down because we had host of factors like interest rates concerns, commodity cool down and couple of domestic worries as well?

It is the interest rate concerns first and foremost because if Fed keeps raising rates at some point, the US economy will slowdown and we are actually looking for it. It is true for China, as China wants to get away from an export and investment driven model to more consumptions and it means that the demand for commodities will soften.

So that is the whole problem and it is not just an India specific problem, but it has to do with the global economy's fear of a slowdown.

For the listed entities in commodities, the metal universe in specific. Have you gone underweight on them now? 

We are not aggressive buyers. We are playing commodities and have hedge funds as well as long only funds. We are not negative on the sector as we recognised that things have got a little bit ahead of themselves. We think long-term commodity cycle is intact and there is no question about it. But in the near term, this is a cyclical correction and we have to ride it out.

Would you use any opportunity to nibble into the Indian markets or would you wait for the fall to finish itself off?

At some point, it is going to stop declining and I would like to see that happening whether it is near the fair value target or a bit above that. But I would not be surprised to see some kind of a trading range developing over the next few months and then one will see where the value is and then go into those equities.

What have you heard from your peers in terms of how fund inflows will now be dictated for this market? Has it slackened the interest in the market or do you think with lower levels, there will still be fund flows from abroad?

I think the market remains attractive and the fund flow will remain, especially after the correction has run its course. I think there was a bit of scare last week, when there were rumours that the tax situation for foreign investors might change.

That had dissolved, but it came again at a time when the market was already vulnerable and although it was not a cause, it was a contributing factor. But now, we don't have to worry about that and foreign investors will take heart and look at India again.

In terms of sectors, what is your highest underweight at this point in time?

We are underweight on autos, consumers and in some commodity related sectors. But we are overweight on banks, information technology and telecom. I think most of the domestic driven sectors should be overweight.

What is your view on the banking space? SBI came out with disappointing set of numbers. 

That is true, but State Bank of India remains our top pick among the Indian banks. If one looks at the ratios, as far as valuation and price-to-book value are concerned, from a valuation perspective, we think it is attractive and we stick to it. If the sell off continues, it would be a buying opportunity for us.

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