Mumbai: There will not be any long term negative impact on markets even if the government decides to act tough on the fiscal front and rolls back the stimulus that drove consumption and fuelled the stock market rally last year.
This is the key takeaway from Mint’s Budget Agenda 2010 that kicked off in the city on Wednesday. The four-part series will travel across the country through February in the run up to the Budget, flagging off critical issues and building consensus among market men, corporate captains, economists and policy makers. The Mumbai leg of the agenda focused on “Markets: Bull Run or Asset Bubble?” The Budget is scheduled for 26 February.
Ullal Ravindra Bhat, managing director of the Indian arm of Dalton Strategic Partnership Llp, a foreign institutional investor registered in India; Shankar Sharma, vice-chairman and joint managing director, First Global; Narayan Ramachandran, chief executive officer (CEO) and country head, Morgan Stanley India; Rashesh Shah, chairman and CEO of Edelweiss Capital Ltd; Pramit Jhaveri, head of global banking and vice-chairman, Asia investment banking, at Citigroup; and S. Naganath, president and CIO of DSP BlackRock Investment Managers Pvt. Ltd, participated in the discussion.
Debating markets: (L to R) Dalton Capital’s Ullal Ravindra Bhat, First Global’s Shankar Sharma, Morgan Stanley’s Narayan Ramachandran, Mint’s Tamal Bandyopadhyay, Edelweiss’ Rashesh Shah, Citigroup’s Pramit Jhaveri and DSP BlackRock’s S. Naganath at the Mint Budget Agenda 2010 discussion in Mumbai. Abhijit Bhatlekar / Mint
Tamal Bandyopadhyay, deputy managing editor of Mint, was the moderator. Edited excerpts:
Also Read All of Mint’s Budget coverage
UR Bhat: The Reserve Bank of India (RBI) has set the agenda by tightening liquidity. RBI has indicated that the ball is in the government’s court and the government will have to do something about the fiscal deficit. Even though the fiscal deficit in India is very high, all developed markets have even higher fiscal deficits. The government has very few options —cut subsidies, cut expenditure or increase taxation. The excise duty cut has led to a huge increase in auto sales.
Whatever happens in the Budget—withdrawal of sops, hike in petrol prices—all are good in the long run. In the short run, market might be disappointed with the Budget. Inflation will peak sometime in three-four months and the economy will grow at 8-9%. India will be better than many other places in the world. I expect the markets to be jittery about the budget.
S Naganath: Currently emerging markets are (the) flavour among foreign investors and within that Asia is seen as a bright spot in terms of economic growth. I think in general, policies in the Budget and even beyond it will continue to keep the growth rate high and that would make the Indian market very appealing to foreign institutional investors. They are looking at China and India as engines of growth.
In terms of investment themes, consumption has played out very nicely in 2009. That consumption demand will probably moderate in 2010 and will be taken over by investment demand. As far as stimulus is concerned, policy makers are conscious of the fact that any abrupt removal will not be right. I think it will be a nuanced removal and I am not too worried about that.
Pramit Jhaveri: Step back to last six months of 2009—all of us were surprised by the recovery. There is a phenomenal opportunity in India. Clearly, there are challenges before the government. For instance, huge capital flows are resulting in rupee appreciation and inflation is going up. But India will continue to be an attractive destination in terms of inflow. We should really be thinking about the supply side of the equation—be it food or infrastructure. It’s about balancing a little more of investment into the composition of GDP (gross domestic product). There certainly are issues as far as the deficit is concerned, but we are not alone in the world. However, the government has no need to set expectations or spook the market by talking numbers.
Shankar Sharma: I think the so-called stimulus packages that came in the late 2008 and 2009 were no package. To attribute the recovery to the stimulus is really being unfair to the consumption story. The recovery just happened; it was not engineered. Which leads me to believe that there was a larger hand at play than what the finance minister thinks...
There won’t be much of a rollback. In India we always had (a) deficit. It’s been there always. It’s good as a talking point. Beyond a point, somehow we muddle along with all kinds of deficits. I don’t think the government is bothered about that. What it’s more bothered about is selling large amounts of stock in the divestment programme.
I am not a Budget watcher. Budgets in India are fairy tales and beyond a point you don’t like fairy tales. The shelf life (of a Budget) is not beyond 10 days. Nobody remembers the provisions of the Budget beyond 10 days... Too much of hoopla gets attached to it.
Narayan Ramachandran: I think this Budget is about consolidation. The 13th Finance Commission banks on the fact that consolidation is required. Because beyond a point, India is capital starved and capital comes from outside.
We will have to have a proper management. When the debt-GDP goes beyond 80%, it begins to ring alarm bells around the world with downgrades and so on.
Both from finance commission report and in flavour, the Budget will have consolidation as its theme.
Rashesh Shah: (Around) Rs100,000 crore will come out of offloading of government stakes in public sector undertakings and 3G auction. If that’s the case, the government will not see the need to do something significant right now. The market is expecting a rise in excise rates for the auto and cement sector.
Interest rates will go up as people feel RBI should do something to tackle inflation. High inflation is statistical as the year ago was low. After three-four months, it will fall.
Early indication is that the current crop is (a) blockbuster crop.
There is expectation that food prices, especially wheat, will come down. Given all these expectations, there is no significant pressure on the government to withdraw stimulus however insignificant it was.
On valuation, corporate earnings and year-end Sensex level
UR Bhat: Over the last fortnight or so, valuations have become slightly more affordable, but certainly not inexpensive. We have always been expensive except for brief interludes. So valuations are not a great argument to buy today; interest rates will rise and is not a great argument to buy today. But earnings growth can be a factor. As of today, we are starting off a low base (of earnings).
S Naganath: I would expect a flat to 10% growth at the end of 2010 if the economy gathers momentum and the fiscal deficit comes under control... We are trading at 16 times FY11 (earnings)... It’s not cheap, it’s not too expensive. (It’s at) fair value.
Narayan Ramachandran: You are going to get a blowout earnings. I see an upside of 30%. Interest rates are a problem and possibly commodity prices too are a problem. I expect the markets to go 15-20% up from here with the catalyst coming from the private sector, as always.
Rashesh Shah: The markets should be able to absorb equity issuances but these will prevent the market from galloping away.
Shankar Sharma: The markets are extremely expensive. The 16-17 times you talk about is a blended rate. (Also) most companies have diluted their return on capital. That’s the real problem in India. (These share dilutions) itself will cause the market to have a pretty strong ceiling. It takes a long time for RoCE (return on capital employed) to go up. In the first half (of 2010), markets would move down by 25%... We would see a recovery after that and probably end 10% down for the year.
The next leg of Mint Budget Agenda will be be held in Kolkata on 11 February on Budget and Inclusion.