BackIndia is still one of the best investment destinations: Vikas Gautam
Aditya Birla Sun Life Asset Management Co's Vikas Gautam says the govt's intent to establish important pro-growth and development policies have kept sentiments buoyant
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Singapore: Signs of an economic recovery in India are clearly visible, for instance in the latest industrial production and inflation data, and corporate earnings have broadly met expectations in the June quarter, said Vikas Gautam, chief executive officer, global offshore business, Aditya Birla Sun Life Asset Management Co. Pte. Ltd. The Narendra Modi-led government’s clear intent to put in place important pro-growth and development policies has kept the markets bullish and global investors buoyant, Singapore-based Gautam said in an interview. Edited excerpts:
There appears to be a bit of a consolidation in the Indian markets in the last couple of weeks. Do you see any market indicators that show recovery is coming back? When can we clearly see an earnings pick-up?
The Indian markets have been every bullish in 2014. From February to May the MSCI India Index was up 16%; and since May, it is up another 9%. The markets have done well in the run-up to the elections and even after. The popular indices—BSE Sensex and Nifty—are trading at all-time high levels. The midcap stock indices have done even better. I would say that the bullish trend continues.
The government’s clear intent on establishing important pro-growth and development policies have kept the sentiment of local as well as global investors buoyant. We have also seen a number of encouraging prints on the macroeconomic front. Industrial production surprised positively for May with 4.7% growth year-on-year (y-o-y), inflation for June saw a further decline with CPI (Consumer Price Index) declining 100 basis points (bps) to 7.3% and WPI (Wholesale Price Index) declining 60 bps to 5.4% month-on-month. (One basis point is one-hundredth of a percentage point.) These trends are green shoots of economic recovery and good from a longer term point of view. Earnings have broadly met expectations for the June quarter. As the incremental steps taken by the government translate to business investments, we will see earnings getting upgraded through 2014-2015.
Some experts share the view that valuations in India still look high and say that foreign mutual funds are very overweight on Indian shares. What is your take? Is there too much optimism when evidence on does not support such expectations?
We believe India has attracted the attention of global investors for the right reasons. Indian GDP (gross domestic product) growth almost halved to 4.5% (in FY13) for reasons quite well known for the last three years. We believe this is a cyclical bottom for Indian GDP growth. On a P/E (price-earnings) basis, Indian markets are trading a little below the long-term average—however, the current earnings are cyclically depressed earnings. As growth drives earnings, valuations will start looking cheaper.
Markets tend to be forward-looking and the reason why Indian market has done well is because investors have begun discounting future growth. We would say that the optimism is not completely unfounded.
In our view, the global monetary policies will remain conducive as the developed countries suffer from low growth and high unemployment rates. This will ensure liquidity flows into emerging markets, especially India. Factors like moderation of crude price and additional inflows from domestic retail and the foreign institutional investor (FII) will continue to drive the broader markets higher. We don’t think global investors are super-bullish on India yet. One indication of a lack of India euphoria is the fact that international India country funds haven’t really seen significant inflows. Most inflows are from ETFs (exchange-traded funds) or emerging market funds.
Which are the sectors you are bullish on?
We expect the macro economy to turn favourable. Green shoots are visible...and we have seen consensus earnings upgrade after a long time. The portfolio is positioned to capitalize on the cyclical turnaround and opportunities arising out of the reforms process. The portfolio is overweight on domestic cyclical sectors like consumer discretionary (products), financials and industrials.
After observing the new government for a couple of months, do you think the big expectations that investors had—where they thought Modi would revolutionize the economy overnight—now appear unrealistic? What is your take on the new government—don’t you agree that it has been vague on the broader structural reforms which investors thought would be their priority?
The government’s resolve to revive the investment and capex cycle is visible through its decisions at different points. Environment clearance for eight SEZs (special economic zones), restructuring of 16 road projects, approval for nine power transmission projects, hiking FDI (foreign direct investment) in defence to 49%, 100% FDI in railway infrastructure, etc., are significant steps towards reviving the economy. Structural reforms like introduction of goods and service tax, changes in labour laws, etc., are also being actively worked upon. We remain optimistic.
Has the Indian economy reached an inflection point? When and how fast do you see recovery happening? What will drive the pick-up?
Yes. In our view, the sub-5% growth seen over the past year is a cyclical bottom. Over the next five years, a stable political regime with key policy initiatives by the central government will aid a cyclical and structural revival in GDP growth. We believe growth can average 6.5-7% per annum over that period and with a potential exit growth rate of 8%. The drivers of growth India will be the structural drivers—infrastructure, exports and consumption. The government has realized the importance of the investment cycle and has undertaken a series of measures to kick-start stalled projects and revive the investment cycle and this bodes well for equity markets.
While the equity markets are scaling new heights, why is retail investor participation falling? It has fallen in the last five years.
Indian households traditionally allocate a very low proportion of their assets to equities—direct or otherwise. At this time, equities form only 1.5% of the annual household savings, down from a peak of 7% in 2008. Gold and real estate in India have delivered phenomenal returns over the past seven years. There is a tendency of retail investors to look at historical returns and then rush to invest. This was the case in 2007-2008 when equity mutual funds received the highest inflows—which was the peak of the market. Equity markets have now started delivering and local investors are likely to soon follow. Equity funds and unit-linked products of insurance companies have started receiving flows.
All asset classes go through cycles and now it’s the time for equities to deliver returns better than other assets such as gold, real estate or fixed income. We firmly believe Indian households’ equity allocation needs to be corrected and should increase substantially to take advantage of favourable conditions over the long term.
What is your take on bond yields?
We believe we have pretty much seen the peak of inflation in India this year. India is one of the few countries with interest rates at historical peaks—there is ample scope for interest rates to come down structurally over the next few years. Bond yields are likely to reduce by 150-200 bps over the next couple of years.
Is India headed towards another battering if the US Federal Reserve begins to increase interest rates next year. What steps should the country take to prepare for tighter global financial conditions?
That’s a question many people ask us. The historical evidence is actually quite the opposite of perception. Periods of rising interest rates in the US have usually been periods of rising or good growth in the US and global economies. This has also usually translated into good growth for emerging economies like India—in fact, Indian markets have always done well in periods of rising interest rates in the US.
What is the best investment at the moment?
We believe India remains one of the best investment destinations across asset classes. While we talked about the equity opportunity, even Indian fixed income offers one of the most attractive opportunities globally. This is driven by the fact that India is among the few countries where interest rates are close to historical highs—there is no way to go, but down. The country has rapidly corrected the current account imbalance and there is a clear will to correct the fiscal deficit. Inflation is likely to taper down in the next few quarters and we expect the currency to remain stable. There is thus a strong case for lower rates in the medium term, making Indian fixed income a lucrative option.
What is your reading of retail inflation, or CPI, over the next two years? When do you see RBI cutting rates?
CPI inflation for the month of June surprised on the downside at 7.31% versus expectations of 7.7%. We expect the moderation in wage growth and a tighter leash on fiscal deficit to further rein in core inflation in the months to come... We expect the first cut by RBI in a quarter or two.
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