Dixit Joshi, head, Asia equities, Deutsche Bank says that government policy action led Indian markets higher in Q4CY12 though current weakness in the Indian market is due to global concerns.
"The Budget has taken few measures to revive the capex cycle and there is a need for consistency in policy action to support the Indian market. I expect global liquidity conditions to be supportive and concerns around austerity in EU could impact global sentiment," he told CNBC-TV18.
Dixit adds that his focus remains on companies exposed to global growth revival and points out that under-investment in emerging-market equities led Indian markets higher. The senior analyst is not too concerned about a hard landing in China and will remain constructive on China in 2013.
Below is an edited transcript of the analysis on CNBC-TV18
Q: India has not been the best performing market by far in 2013. Are investors apprehensive who have invested large sums of money into the market over the last six-to -nine months?
A: We are looking forward to feedback from the investment conference that we are hosting in Mumbai. But a lot has changed over the last year. At the start of 2012, macroeconomic backdrop was weak with serious investor-concerns around macro policy- worries around the capex cycle, the deficit, Greece, global growth and China.
But ever since the finance minister changed, there have been a lot of steps in the right direction. The markets as a consequence performed very well in the fourth quarter of last year and the fruits of that have started to play out this year.
Q: Have your institutional clients opined that in the short-term the Budget has proved to be a negative?
A: The reactions have been weak over the last two or three days, but at the same time the US market is slightly weaker. China has turned weaker on the back of the property curbs. So the global backdrop has been slightly weak over the last two or three days. I think the market needs time to start digesting this news. The concerns regarding the Budget were dwarfed by worries around the Italian election which turned out to be slightly messier than expected.
Investors, specifically regarding India, want to see a roadmap for the next few years. Capex investment is not an event but a process that requires local business confidence which has been boosted a bit by the Budget. The other grave investor-concern is the fiscal deficit which will continue to top the list of worries over the next two or three years.
Though the market has observed that the targeted deficit for 2014 is reasonable, there needs to be consistency and delivery of government initiative. This is a pre-election year and the market is wary of the government resorting to populist measures. Though there is little evidence of any populist measures, consistency for the market is very important.
Q: What does it mean for liquidity flows into emerging markets in Asia, including India? The inflows have been really strong since last year, but would the US sequestration or Italian uncertainty in European markets kickstart a risk-off phase where the inflow is diverted and investment are withdrawn leaving stocks in this part of the world vulnerable?
A: That is exactly what happened last year. The worries around Greece from March to May in 2012 set off a considerable risk-off. Much of that has dissipated due to a global accommodative rate policy. Liquidity will continue to be easy and that will underpin global growth. There have been concerns around a tail event either in the US or mainly in Europe or the hard-soft landing debate around China.
The possibility of the occurrence of each of these events has significantly diminished as policymakers indicated strong measures that will prevent the occurrence of a tail event. So while always a possibility I think that possibility is now very, very remote. So could there be a risk-off? Of course, if concerns around austerity start to spread throughout Europe. Though results of the Italian election have caused some uncertainty, the markets will be watching if the sentiment of uncertainty starts to spread.
Q: Bajaj's results have been quite tepid. Are you getting apprehensive about stocks related to consumer demand in India?
A: Our focus is on three sectors- sectors sensitive to global growth, sectors sensitive to local policy measures and sectors sensitive to the macroeconomic backdrop and the potentially declining rate cycle. The global GDP growth estimate of around 3.2 percent for this year is quite robust with China estimated to grow 8.5-9 percent. Households in the US and elsewhere are deleveraged. Corporates with massive reserves of cash moved out of equities into bonds over the last few years and while the bond markets posted a great performance during that period, some of that has started to reverse and benefit India.
What foreign investors are keen on really is clarity around capex, investment, growth and the roadmap for the next few years. The Budget has gone some way in delivering that. Though the situation is familiar to foreign investors, the focus is on consistency through the rest of the year.
Q: Would institutional interest continue if growth falls to 4.5 percent?
A: The global trend of assets moving back into equities over the last couple of months of which India no doubt being a beneficiary, it is within the context of a marketplace that generally has been underinvested in equities, particularly emerging market equities.
The inflow across Asia this year was USD 13 billion. Last year, on a full-year basis, inflows were around USD 50 billion. Of that USD 13 billion, inflows worth USD 8 billion came to India versus a full-year inflow of USD 25 billion last year. This is despite a market that has not performed.
India’s ability to attract considerable inflows in the last two months of the year was on the back of locals selling. While local investors have been selling on the lack of growth and dismal earnings, foreign investors are taking a slightly longer view and looking at this as much more an asset allocation trade.
Q: The first few months turned out very different from what was expected from the market. How high is the probability that the year turns out to be negative for the market?
A: The fourth quarter witnessed stellar performance to allow the market a breather. The test for foreign-investor sentiment is to observe what is bought in a declining market. The interest was strong throughout January and February in spite of a weaker market, especially when the rest of Asia was performing better. So I think that does set the market slightly on a positive note for the remaining part of the year.
There are a number of factors that are to take effect for the remaining part of the year. If global GDP growth remains robust with the backdrop of no occurrence of tail events, potentially more corporate activity globally, the asset allocation trade returning to equities and barring any catastrophic event, we do not expect to see a massive risk-off scenario over the next couple of months.
Q: What could the rumbles in China which has started to underperfom, mean for India?
A: China seems to have articulated quite well the direction it intends to take over the next two to three years. The market needs to digest the property curbs and it will turn out to be quite constructive for China. However, India will continue to attract a disproportionate amount of overall Asian assets this year.