An accommodative central bank, structural reforms and infra speeding boost prospectus for the Indian economy and corporates says Dixit Joshi, managing director & head of equities-Asia Pacific, Deutsche Bank. In an interview with Samie Modak, Joshi says the Union Budget has ticked most boxes and India remains largely insulated from global risk-off events. Edited excerpts:
What is your take on the Budget?
It is a very good Budget. About 80% of the items that one had expected are embedded in the Budget. There will always be a set of views which will remain unsatisfied. But what this budget does is continue on the reform path that this government set out on from the day it was appointed. It is a pragmatic and optimistic Budget, which recognises some of the nuances that India needs to operate on.
The Budget lacked ‘big bang’ reforms that the market was expecting.
I disagree with that. What this government has done is give us clarity on policy. You might want a faster acceleration but the path is very clear. Measures like deferral of GAAR, attracting investment, bringing down corporate tax rate are all important. What I’d have liked to see in the Budget, in addition to that, was broadening of the personal tax base so that the tax net is widened. The Budget increases the states’ pie of overall tax from 49% to 61%. With the huge amount of capex lined up, the best place to decide the deployment in the most-efficient way is at the state level.
Growth in corporate earnings isn’t coming by easy. What is your outlook?
Earnings have been week in the last quarter of 2014. There are a number of reasons for that. Inflation, which has been the focus of the government and the RBI, has come off. Earning also has come off as a consequence. That’s factor number one. Secondly, rural demand has been week. I think companies will see margin expansion over the next two or three quarters, which will help in offsetting the two factors. Our view is that earnings will grow 17% this year. The market trades at around 17 times, which is about 9% premium to the 10-year average valuation. The 9% premium, I don’t think is a very expensive. Within emerging markets and even the global frame, India is one of the most attractive stories. It has got the demographic factor. The rate environment is high and coming off fast. You have the government focus on structural-reforms and you have foreign investors who are underinvested in India.
Do you think foreign investors are under-invested?
For some time now, India within the emerging market (EM) space has been an outperformer, so EM funds have been overweight on India but if you look at broad global funds like pensions, endowments, large mutual funds all are under-invested in India, which I think will start correcting. Also, the cycle has just turned in terms of investments by domestic institutions. These two will be very powerful catalysts.
Why global funds are suddenly attracted towards India?
The last decade took India off the investor map. With his travels around the world, PM Modi has not just encouraged diplomacy but also business and investment also at the same time. He has re-branded India as an attractive investment destination, which is a very big factor in getting foreign funds involved. Across Asia Pacific, there are three markets of substantial interest to investors. China, with its reform agenda, Japan due to its monetary policy agenda. And India, which has a combination of both. Our prediction is 75 basis rate cut in the next six months.
The budget has eased the tax regime for FIIs. Do you think that will led to an increase in foreign flows?
Offering foreign investors clarity in terms of taxation is very important over the next few years as that’s been a constant bug bear for foreign investors. The government has been sensitive to the feedback. The signal that the government is sending is that we are open to business and we will give transparency. To illustrate, our Deutsche conference which opened today attracted a record attendance of investors which only proves that India can’t be ignored as a part of global portfolio.
What are the sectors and themes that you like?
Banks, transportation and power stocks are likely to be the big beneficiaries. A lot of investments are going into that space. Also, technology, where we are seeing a change in the way India thinks and connects. This government has been very in-sync with the technological changes. India has hit the sweet spot with the smartphone move. So that’s going to be a huge enabler here in terms of growth.
Deutsche Bank expects 10% upside from current levels.
My India team has set out a Sensex target of 33,000 for this year. But I am more bullish. The reasons being a combination of FII under investment, accommodative RBI, structural reforms and infrastructure spending. Good spending with more driven by states will reduce inefencies. This will drive future GDP growth and create jobs.
What are the key global risks for the India markets?
A disorderly event in Greece would lead to a risk-off event globally. That said you have the ECB, which will in next two years, buy more than the existing pool of bonds available in the Eurozone. So you have the biggest period of monetary easing, globally that we have seen taking place in Europe, which will lead to a lot more interest in European assets. Equally, there will be a search for yield which will lead to attractive destinations like India.
Do you think ECB and Japan stimulus will find its way into India?
With the combination of really attractive yields, in a world where you have zero to negative rates, conducive macro backdrop with expectations of rates going down significantly in the next few years, you will see funds flow to India.
Will there be shocks in the financial market when the US hikes interest rates?
There has seldom been a period of change in the rate cycle without volatility. This time could be the same. However, Governor Rajan has firmly indicated that when that does happen, India will be in a really strong position. The $ 333 billion of forex reserves, might seem like a good amount for now, but the governor has indicated that he is aiming higher. With the kind of inflows we are seeing, the RBI is doing the right thing in planning for a rainy day.