‘Long-term Money That Left India Isn’t Back Yet’
The new government should not worry too much about the stock market; it should focus on structural reforms, said Dixit Joshi, managing director and head, equities, Asia Pacific, Deutsche Bank. In an interview with Nishanth Vasudevan, Hong Kong-based Joshi said there could be some consolidation now and that could be a good opportunity of investors to purchase. Edited excerpts: There is a camp which believes that the market is expecting too much from the new government in the near-term given that some of the economic issues like inflation and industrial slowdown are deep-rooted. What are your thoughts? Typically analysts tend to be conservative about the impact of big changes and we believe it takes around 8 quarters before you typically start to see results. Investors need to be patient and take the longer term view. The new government should not worry too much about the stock market; the focus should be on structural reforms that are so necessary. These would be focused on the factors of production i.e. land and labour. In addition, they also need to provide a road map for ushering GST. Other reforms should be faster clearances of stalled projects and accelerated de-regulation of diesel prices on which national consensus has been built. In your interactions with foreign investors, what is the sense that you are getting about India? Are they willing to increase their India weightage vis-à-vis other emerging markets? Till recently, India was not on the radar of foreign investors as there were issues around policy clarity and lack of capex. There were more compelling opportunities elsewhere. We believe that’s completely reversed now. We have seen really strong FII flows come into India YTD (year to date) of over $7.7 billion and this year promises to be a strong one. If the government delivers on the promises it made during the elections, we will have strong flows over the next two-three years.
But, have we seen a lot of long term money that left India actually come back? No. That money typically moves in more slowly. These are funds that are driven by asset allocation, and over time will start coming into India. Again, having a medium term perspective is important as markets can undershoot and overshoot, and often they do. Are valuations looking expensive after the recent rally when you compare them historically and with other emerging markets? India has had a good rally; the markets are up 21% in dollar terms. So, is it expensive versus three months ago or six months ago when you bought it? Sensex is currently trading at 15.5 times one year forward earnings, which is in line with the past 5-year average. That is not expensive for a market which is on the cusp of a change. Obviously, investors with a shorter term time horizon, will book profits. As growth revives, we will see longer-term flows back. Is the market factoring in all of the Modi dividend? Not yet. But that’s a strategic call, and a medium term call. Not a tactical call. There may be some consolidation given the strong performance which is healthy and will allow entry points for those who haven’t participated. Are markets downplaying the impact of QE rollback and possible interest rate increases in the US next year? Do you expect a slowdown in FII inflows into emerging markets including India? A year ago India was vulnerable to the Fed taper. That whole dynamic has changed. On account of proactive measures by the RBI governor, additional reserves have flowed in, which eased the capital account situation. We went from a position of vulnerability to a position of strength which will help us weather any rise in US rates. India's external balances no longer look as fragile as they did in 2013. If anything, higher US dollar rates will help keep the rupee competitive. Indian markets will be driven much more by what investors see in terms of real action coming out of New Delhi. There has been a lot of anticipation around what Modi will do. There’s been a lot of talk around what structural reforms are required. Now people will want to see actual delivery and actual actions come through. Which are the sectors and themes that you like? We like infra, energy, materials and banking sectors.