Deutsche Bank (DB) remains quite positive on the Indian economy as well as the equity markets for 2013.
We believe the worst of global economic and policy uncertainty is behind us, and key central banks will likely continue with their easing bias. In a growth-starved world, the strong global liquidity should get attracted to India, which remains an attractive structural growth story, albeit with lowered expectations on the growth rate (versus those at the start of 2012).
We expect India’s key economic parameters (GDP growth, fiscal and current account deficits and inflation) to be better than in 2012—and maybe even much better than our own expectations (DB expects FY14 GDP growth of 6.5%) if the government continues with more measures to boost growth and remove various bottlenecks. This in turn should lead to lower interest rates (we expect upto 100 basis points of policy rate cuts in 2013) and pose upside to estimates for corporate earnings growth rates. (A basis point is one-hundredth of a percentage point).
With the Sensex at just above 19,000 points, India’s benchmark index is trading at about 15 times one-year forward earnings, which is in the middle of its historical trading range. This appears attractive given the prospects for positive earnings surprises and interest rate cuts. Relative to other markets, India appears attractive especially when factoring in the growth prospects, RoEs (returns on equity), and risk to earnings. Even within the Sensex, if one looks at the non-FMCG/pharma companies, they are at much cheaper valuations. Of course, there are many more cheaper alternatives among small/mid-caps outside the Sensex companies.
From an investor positioning perspective also, we believe most global investors are underweight equities (versus bonds) and emerging market equities in particular. Even Indian retail investors have largely stayed out of equities over the last few years. Hence, this also supports our positive stance on Indian equities in 2013.
We continue to suggest financials and infrastructure as the best way to play any India rally.
Key risks include a worsening in domestic politics, a potential sovereign ratings downgrade, a poor monsoon, any sharp increases in global oil prices, and/or a sharp deterioration in the EU sovereign debt situation.
Some key things that we would like to see from the government from an equities market perspective are:
l Sustainable reduction in the fiscal deficit, especially with a greater focus on reducing non-productive government expenditure.
l Faster clearances for various private sector projects that are stuck awaiting government approvals.
l Help increase infrastructure buildout, using both government-led projects as well as via commercially viable private-sector led projects.
l Devise policies which help to deepen and broaden the long-term debt market.
l Help further reduce administrative, operational, tax-related impediments faced by FII and FDI investors.
Pratik Gupta is managing director and head of equities at Deutsche Equities India.