HSBC Global Asset Management is upbeat about the reforms initiated by the government of Prime Minister Narendra Modi which it says has reinforced its confidence in the ability of Indian markets to deliver returns to investors.
“I would give him an 11 out of 10,” Bill Maldonado, chief investment officer (CIO), Asia-Pacific & Global CIO, equities at HSBC Global Asset Management, said in an interview in Mumbai.
Maldonado was responding when asked to rate the Modi government on a scale of 0 to 10, with 0 being the least efficient and 10 being the most efficient. HSBC Global Asset Management manages around $22.3 billion of Indian equities.
“Demonetization was unexpected and it was a very bold move,” Maldonado said.
There had been worries about fallout of the shock 8 November move on India’s growth, but it was absorbed quite easily by the economy, he said.
“But, I think the more fundamental reform is GST (goods and services tax),” Maldonado said, adding it would be a game changer.
GST, the biggest tax reform India has undertaken since Independence, is to take effect on 1 July. It will subsume various indirect taxes at the central and the state level including excise duty, service tax, value-added tax, entertainment tax and luxury tax, and remove inter-state barriers to trade in goods and services.
“I think that international investors, in particular, were very focused on GST as the main reform they wanted to see from the government, and it was acknowledged that it was a difficult reform to do,” Maldonado said.
He said there had been concerns that GST may not be passed by the current Parliament, but the government moved very quickly and decisively to push it through.
Maldonado, who has been tracking global equities for around three decades, said he was more confident about the Indian markets’ ability to deliver than before.
The Indian markets hit record highs on Wednesday, with the Sensex and the Nifty up 13.6% and 14.9% respectively in the year to date, fuelled by foreign institutional inflows of a net of $5.6 billion and domestic fund injections of a net of Rs11,594.85 crore.
Currently, the Sensex trades at 22.12 times fiscal year 2018 earnings, at a 19.01% premium to the five-year average of 18.59 times.
“I think at this point, Indian equities are probably in neutral territory in terms of valuation, possibly slightly overvalued but nothing very severe,” Maldonado said.
Corporate earnings would be the key driver for Indian markets going ahead, said Maldonado, who expects earnings to turn around over the next one year.
“I think the most important thing is what happens to earnings from now on,” he said.
“I would say we are at or around the turning point,” he added.