Nidhi Mahurkar, Pictet Asset Management says the government needs to take more steps to revive growth, while adding that the fast tracking of certain projects by the Cabinet Committee on Infrastructure was encouraging.
Pictet Asset Management is cautious on the Indian market, even though it likes the long-term story, says Nidhi Mahurkar, its Head Asia Ex-Japan Long Short Fund. In an interview to CNBC-TV18, Mahurkar sees persistent inflation, twin deficits (fiscal and current account) and weak growth as the big worries.
And while the RBI has been cutting the benchmark repo rate, it is not reflecting in the rates that banks are charging their borrowers.
Mahurkar says the government needs to take more steps to revive growth, while adding that the fast tracking of certain projects by the Cabinet Committee on Infrastructure was encouraging. She sees political uncertainty as an intensifying risk for the country.
Below is an edited transcript of the interview on CNBC-TV18.
Q: From what I see from your recent portfolios you probably have an underweight compared to other markets, underweight in India. Can you tell us why?
A: Let me enumerate the context in terms of our current stance in India. It is a compromise between liking the long-term story of India versus concerns that we have had on cyclical basis. India has had weight on its shoulders in the last six months although the one year performance of the market is pretty decent. The market is up about 20 percent, but over the last six months we have had concerns on how the macro has evolved in particular on twin deficits, sticky inflation and growth being well below potential. So, in that backdrop while we continue to like the long-term outlook for this market, we have kept a somewhat defensive cautious stance on India. Having said that incrementally we feel more positive about India going forward and to that extent our stance in India is gradually changing as we speak.
Q: Over the last few weeks some of your peers have taken comfort from the fact that some commodity prices have started coming off and maybe the current account deficit number will also improve going forward. Have you started therefore recalibrating weightages by upping some of your exposure in India over the last few weeks?
A: We are cognizant of these changes, the delta in both the macro and the micro indicators. Let me outline few things that incrementally make me more constructive in India. In the first instance, inflation which has been sticky in India for the last year and a half and has been the reason behind the Reserve Bank of India’s cautious policy both in terms of rhetoric and in terms of the actual easing of the interest rate cycle. We have now seen some amelioration on that front, so we expect a gradual easing cycle, which we think, has an impact on asset markets in India.
There has been some relief on commodity prices of both gold and oil although the extent of relief is debatable because there has been some recouping in the price of gold and oil. Also some very green shoots of recovery in terms of the industrial production momentum although the high frequency indicators are more mixed, but if growth begins to turnaround both from a low base effect and some acceleration, we think that the market will reward that. So, it is a qualified in terms of improvement in the fundamental picture. India is emerging from two year downward adjustment in earnings growth forecast, which we see as having plateaued.
There are certain parts of the market which are colossally cheap and others which have maintained their valuation premium where you had a more consistent delivery of earnings growth, a record of consistency. Now we see that earnings downdraft over the last 18 months have plateaued. So, putting it all together about 13 times more earnings, which is close to historical average for India we feel more constructive on India.
Q: While most would agree with you what you have outlined on the inflation front, the concern is on growth because we haven't seen any major pickup in earnings growth yet in the quarters that have gone by and even the fall in core inflation would lead some to believe that the lack of pricing power is coming through from a demand slowdown and therefore one cannot say with certainty that growth has bottomed out. Do you worry more about growth now than about the inflation and the current account deficit (CAD) which was the big problem that was reining in the Indian market performance?
A: The big catalyst for the Indian market will be definitive visibility that growth forecasts are being upgraded and to that extent while the easing cycle will have some impact, we have had 100 bps of repo rate cuts which haven't really been transmitted into the asset side. If you look at the gap between the mid corporate sector and India's borrowing, the difference between the repo rate and the street rate for mid corporates is about 900 bps as high as it has been. This in turn is raising pockets of concern in terms of cash flow impairment in the middle corporate part of the economy.
So growth is below potential and easing hasn’t really transmitted, which is an awkward spot for the country to be in. However, looking ahead we think both the base effect as well as month on month improvement will result in some pickup in growth. I will qualify it by saying that we certainly need more from the government in terms of administrative reforms. We need to see progress on reform agenda be it on subsidies, infrastructure, insurance and pension, food security, which unfortunately have stalled in the most recent session of parliament. The investment cycle and corporate cycle should recover.
Q: While it is good to hear that you are upping your weightage now in the light of slightly incrementally positive macro in India, you are doing it at a time where in the next few months you will have some important state elections and then it is anybody’s guess when the next big general election happens. Do you see that as a pivotal event for Indian market performance or as a headwind in investment decisions as such?
A: The state and national elections are scheduled over the next 10-12 months in India. This is an intensifying risk to the extent that reform measures are beholden to either opposition pressure or like a recent ally walking out of the government. This will be a headwind. We are hopeful that they move forward on the reform trajectory to get growth back on track again. 5.5 percent or below gross domestic product (GDP) growth is recessionary growth for India.
So, yes, this does remain a wild card and our stance is defensive going into the elections. However, we are hopeful that things will get resolved. Some small areas of encouragement are that the cabinet committee on investment (CCI) has begun to fast-track investments in those areas. In the areas of coal, energy, power, they need to take more steps and we are seeing some fast tracking of mega projects in that arena.
Also in the power sector tariff hikes have been taken. We think that the power issues will get resolved over the next six-nine months. We are quite encouraged by the transparency that the Reserve Bank of India is providing moving on to the banking sector by gradually shrinking the restructured book of the public sector banks. The step that they are taking to institute minimum provisioning on restructured loans of these banks is a welcome step in the right direction.
However, there is a lot more that they need to do in particular on land acquisition, subsidies and infrastructure. We need some concrete progress there and to the extent that recently we had to two ministers resigning. If the government is beholden to coalition pressure and you begin to see some pushback on legislative progress then that is the window of opportunity lost and will be a cause for concern.
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