While the investment cycle is unlikely to pick-up this fiscal on back of stressed loans, but initiatives of Narendra Modi-led government will continue to drive consumer and investor sentiments.
India is the most interesting long-term equity story in Asia and emerging markets, even with its weak conventional macroeconomic indicators, writes Chris Wood of CLSA in the Greed & fear report.
Wood does not see the investment cycle picking up soon, mainly due to strained corporate balance sheets and overcapacity across sectors. However, he is hopeful that the initiatives of Narendra Modi-led government will continue to drive consumer and investor sentiments.
And that makes a case for owning Indian equities despite their expensive valuations, according to Wood.
Modi’s win in Uttar Pradesh has further cemented Greed & fear’s overweight stance on the country. CLSA has a 24 percent allocation in the Asia Pacific ex-Pacific relative-return portfolio.
‘Key man’ risk is the biggest threat to the Indian stock market, which has been the case since Narendra Modi came to power in 2014. However, foreign investor interest is returning now, especially after the UP win, says Wood.
FIIs net sold close to Rs 22,000 crore of equities from October last year through February this year. For March, so far, they have net bought over Rs 16,000 crore of shares.
Also, the renewed weakness in crude prices is a positive to an oil importing nation like India, says the report.
After showing some strength earlier this calendar, crude has slipped below USD 50/barrel. The production cut by some OPEC members has been neutralised by a steady stream of supply from US oil producers who continue to add capacity.
Wood sees demonetisation as a huge catalyst for growth as it promotes use of financial assets in an ‘organised’ economy.
“This process will be further enabled by the implementation of the Goods and Services Tax (GST), due on 1 July, which will create a transparent trail of transactions. The above means there should only be upside in terms of the trend in government revenues as a percentage of GDP which are currently running at 21%, though up from a low of 18.5% in 2009,” says the report.
Wood feels the one disappointment of the Modi administration has been the failure to recapitalise the public sector banks more proactively, a failure partly driven by the fact that Modi does not want to reduce the government’s stake in these banks below 50 percent."On this point, it increasingly looks like the Modi government’s strategy is to leave the stateowned banks to address their problems by natural attrition. If this is indeed the case, it means there is a huge growth opportunity for the private sector banks to further take market share inthe interim," says the report