India most attractive market; Modi key: CLSA’s Christopher Wood10 min read . Updated: 18 Nov 2014, 05:12 PM IST
In an interview, Wood says the India economy has bottomed out and a rating upgrade may be around the corner
In an interview, Wood says the India economy has bottomed out and a rating upgrade may be around the corner
Gurgaon: India is the most attractive equity market in the world from a five-year perspective, Christopher Wood, managing director of CLSA Ltd, Asia’s leading equity brokerage and investment group focused on institutional broking, said on Monday. In an interview, Wood said the India economy has bottomed out and a rating upgrade may be around the corner. Edited excerpts:
What is the outlook for Indian equities?
I have been saying this and I continue to say it, India is the most attractive equity market in the emerging market world. In fact, it is the most attractive equity market globally on a five-year view.
Obviously, India has done extremely well. So, I have been overweight on India for quite a long time.
When I was in India in November 2013, it became clear that Mr. (Narendra) Modi’s chances of winning the election were growing and it also became clear that the economy was bottoming out. I increased it (my weightage) even more when the degree of his majority became clear. So I have been heavily overweight India all year. If India pulls back in any significant way, which is always possible, I will increase my weighting further. But I am not going to increase it now because the market hasn’t pulled back.
If we get another investment cycle going in India similar to the investment cycle we had between 2002 and 2009, then I think the Sensex will get to 40,000 points. I have got no date (for this). But my point is that if you believe that the investment cycle is going to start in India, then you should own Indian equities.
How does India compare with other emerging markets and global markets?
Beyond the fact that India is a good story because of the happy coincidence of the economy bottoming out as well as the election of the most pro-growth, pro-investment leader in the world today, the other issue is that there is a lot of negative issues relating to other emerging markets, many of whom are commodity-geared. Brazil, South Africa, Russia are more commodity-geared. So among the major emerging markets, India looks the best positioned and is also more possibly geared to benefit from the falling oil prices.
How long are investors ready to wait for the government’s policies to come into effect?
The key thing that Mr Modi needs to do is to make the bureaucracy work. The most important thing is to remove blockages rather than passing any laws. The reforms laws can come later.
In terms of what has been announced by the new government so far, one of the most interesting policies was the proposal to create bank accounts for everybody and using technology to accelerate financial deepening. Hopefully, the UID (unique identification number) scheme will continue to be expanded. Symbolically, the decision to abolish the Planning Commission was significant. It sent a signal.
Following the Supreme Court’s decision to declare all those coal blocks illegal, it was important to come very quickly with a clear agenda. He (Modi) has done more than anyone could expect today. He has created a clear mechanism for auctioning the coal blocks again.
Two things that will be key in the first quarter (of next calendar year) will be execution of the coal block auction. And the second will be the budget. But the most important thing is to get the bureaucracy working and getting FDI (foreign direct investment). I am not expecting a V-shaped recovery, but if there is no sign of the investment cycle picking up for two years after Mr Modi is elected, then it is going to be a disappointment.
What do you want to see in the budget?
Not particularly from the budget, but what I would like to see is a clear roadmap for introduction of the goods and services tax, implementation of land and labour reforms.
Is India on its way to an economic recovery?
I think the economy has bottomed out and the earnings downgrades have bottomed out. Investments into infrastructure will be the key to start the investment cycle. The land acquisition reforms are important there.
The railways, roads, the freight transport corridors will be important areas. The issue is if the private sector is in a position to take part. The issue is whether some of the infrastructure-related companies that have leverage from the previous cycle will be able to take part or are they too leveraged?
That relates to issues if their debts are restructured. One issue that the market will like to see the government resolve is the recapitalization of state-owned banks. And that’s an area where we haven’t had any real evidence of action. That’s an area where I would like to see what the roadmap is.
In this year’s budget, the government did not roll back the retrospective amendments to tax laws. Will it impact foreign investments into the country?
That is a big negative for foreign direct investment. It was one area where people were expecting action and nothing much was done to correct it. It is a important negative because it was retrospective.
Have interest rates in India peaked out? When do you see the Reserve Bank of India (RBI) easing rates?
My guess is that they have peaked out. It is obvious that the RBI governor (Raghuram Rajan) doesn’t want to lower rates, but he is going to come under more political criticism. My view is very simple. The longer it takes to cut rates, the more quickly the rates will come down later. I am looking at it from a market standpoint. From a market standpoint, it is a perfect cycle. If he cuts rates, it is good news and if he doesn’t cut rates, you just know that he is going to cut later.
Meanwhile, foreigners will be buying Indian debt as well as equity. In fact, there is more money going into debt than equity this year because the debt has relatively better valuations. The stocks have gone up a lot, but you have got very little evidence that the economy is picking up yet. But the bonds have started to go up as you get more and more evidence that inflation has peaked.
So, you don’t expect US interest rates to rise in 2015?
No, but the market does, and the consensus does and RBI would think that. That is another reason why RBI doesn’t want to cut rates too quickly because it is expecting US monetary tightening next year.
There may be an attempt to raise rates in the US, but if they raise US rates, it will set off stresses in the financial markets, which would discourage the central bank from proceeding with the tightening.
My base case is that the Fed (US Federal Reserve) is more likely to resume QE (quantitative easing) than raise rates next year.
Apart from India, which other emerging markets look attractive to you at this point of time?
My big positive in Asia apart from India is the Philippines. But I have been heavily overweight Philippines the last three or four years. This year I have reduced my overweight in Philippines and increased it in India.
It (Philippines) has been the best story in Asia in the last three or four years. It has the best economic growth after China, with better demographics. So, India and Philippines make for very good demographics, and they have both got service sector economies.
In Indian stocks, your basket looks heavily tilted towards private banks. What is your take on them?
I think we are entering a new positive credit cycle. Although there is little growth yet, as credit growth has continued to slow.
Do you plan to add state-owned banks to your portfolio?
I could. It would be very attractive to own state-owned banks, if you saw clear evidence that the government was going to break conditions to force them to recapitalize. I think that scenario is policy driven.
The finance minister has spoken about completely privatizing loss-making PSUs (public-sector undertakings), which would have been otherwise shut down? There could be some scope of FDI also.
If they completely privatize and give up majority, then there will definitely be interest. But, obviously, I would have thought labour laws is an issue too.
Modi announced this ‘Make in India’ initiative. Do you think that can be a success?
That is a tougher call. I think, first, the infrastructure needs to be addressed, and then the labour laws. One reason that the Japanese are very happy to do this (investments) is that they had very good experience in Gujarat. There is clearly room for manufacturing to improve in India, but I would say an area like auto has more potential, but it will be difficult, say, in electronics. I think India does not have infrastructure to do that.
The mid-cap and small-cap indices have done exceedingly well. Are the risks higher there?
This time last year, they were very cheap. That’s no longer the case. I was advising investors last year this time to buy some more mid-caps in their portfolios. But now I wouldn’t generalize. It is stock-specific.
There is obviously more risk now. It is much more bottom up and selective approach now.
You have JustDial in your portfolio. What do you think of the India e-commerce story?
The story is not going to be as good as China. In China, you’ve got really good infrastructure. Just the practical process of delivering the goods to people is much more user-friendly in China. The second thing that Chinese companies have an advantage in is the language. It is much harder for this US companies to compete in China, not because of the politics, but because of the language. So, Baidu is the dominant search engine in the China. So, in India, the competition will be tougher from these American tech companies. Also, in India, the infrastructure is not there.
The key driver is going to be smartphones, which are becoming affordable. In the last year or two, we had this boom in smartphone sales in China, and people are expecting the same thing to happen in India and Indonesia over the next five years. So, you are seeing the SoftBank making all these investments in Indian e-commerce.
Which sectors are you pessimistic about in India or which would you ignore?
I am not really negative on anything. Even the state-run banks or state-run enterprises could be positively impacted if Mr Modi does what he said he was going to do. I am not negative on pharmaceuticals or software.
Do you think India’s ratings can now be upgraded?
Yes. It is down the road.
Any kind of timeframe?
If inflation comes down as expected, and if the current account deficit reduces, and the fiscal thing stabilizes..., but the fiscal thing needs to see real improvement.
What is your view on the rupee?
I think in the world where the dollar is rallying against emerging market currencies, I think the rupee is relatively stable. I am not expecting big volatility in the rupee one way or the other.
What are the key downside risks you see to the Indian equity market?
The single biggest risk is if something happens to Mr Modi. The market would be down 20% in dollar terms very quickly.
And not Mr Modi not being able to implement the promises he had made?
No, that’s a much lesser risk.
How long are you ready to wait for it? Has Modi met your expectations?
Absolutely. There is this very fact that he has abolished the Planning Commission, and the fact that he has removed the diesel subsidies.
Do you think he can replicate the Gujarat model at the centre?
If he replicates even 50%, it’s a huge deal. What he is trying to do is create dynamics, where individual Indian states compete with each other to get investments. So he can’t do it all himself. He has to create a framework of the people competing to get investments.
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