Change in RBI stance, risk averse sentiment to drive market

Things seemed to have changed in terms of sentiment at least in the last few days for our market. But has it changed the game fundamentally? According to Nilesh Jasani, CEO, Jefferies Singapore, reforms, by themselves, may not really change much for the Indian market but if animal spirit or risk on causes the distressed companies to get more money then one can expect good times to come.

FDI direct investment by foreigners is less than 6% of total investments made in India. Jasani believes that the even if we get a few billion of dollars from foreign investors because of retail liberalization or aviation liberalization, it will not really change the game. “Our biggest problem is that domestic investments are not happening. Domestic investments, new project announcements are down 70-80% from the peak,” he said.

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Jasani feels that the sudden collapse in the investment cycle is not due interest rates or policy inaction, but the corruption scandals which have come out.

“The main cause now, is the fact that two years of slowdown and growth champions in India really don't have any money on their balance sheet. They are extremely leveraged and their leveraged situation has gone from bad to materially worse. Even with the best policies, chances are that those who do the major investments in India are not going to suddenly say, ‘let me put up a new road, or put a new steel plant or something like that,” he said.

Below is the verbatim transcript of the interview

Q: Do you think it is a lot of hyperbole or do you think it calls for a complete sea change in the way investors should look at India?

A: You are not going to like the answer, it is at best somewhere in the middle. Let’s put it this way that the measures that were announced last Friday are phenomenal. They were conceived a few years back when everything was hunky-dory. They were never supposed to be responses for a slowdown. Finally, they have happened and that’s a very big positive.

At the same time, let’s think about the problem that we have. FDI direct investment by foreigners is less than 6% of total investments made in India. Even if we get a few billion of dollars from foreign investors because of retail liberalization or aviation liberalization, that will not really change the game. Our biggest problem is that domestic investments are not happening. Domestic investments, new project announcements are down 70-80% from the peak.

Whatever happens on the FDI side will not cause a turnaround in domestic investments. From that viewpoint, we are not really going to change the game simply from those announcements. What can happen for the market is the market itself will start solving economic problems. Let’s say in the best case, there are another three months of event-driven rally in the stock market, be it global events, local events for whatever reason equity markets in India go up by 15-20%, some of the distressed companies share prices go up by 40-50-80%.

At that point, we will get a repeat of what happened in May 2009; i.e. companies whose balance sheets are distressed will start doing equity issues, and if that happens, the market will start solving fundamental issues, that’s the best case for India. I don’t think reforms, by themselves, really change much but if animal spirit or risk on causes the distressed companies to get more money then we will have something good going on.

Q: How much of the whole investment cycle is linked to sentiment at this point to perceptions of policy inaction? Do you think any change on the margin of those perceptions can re-stoke in part the investment cycle, which maybe the bigger takeaway from what the government is trying to do rather than a few billion dollars coming in, in a retail venture or in an airline company.

A: Our views are very different on why investments have suddenly collapsed in India. If you think about our country, the reality is that there is lot of demand, there is lot of unemployed labour and there is lot of unemployed capital. There is no reason for investments to all of a sudden collapse in a country like India. Still it did in 2010, and it did by a factor of new project announcements have completely fallen off the cliff. Why did that happen? - I don't think it was because of interest rates or policy inaction. There was nothing that was suddenly different on the policy front. The reason why it happened was because of the corruption scandals that suddenly started coming out of nowhere.

Again a question has to be asked on why that happened? We always had some informal dealings between businesses and bureaucrats businesses and other parties all the time. One of the main reasons the corruption scandals suddenly started coming out in 2010 and not in 2008, or 2006 or 2004 was because of data revolution in India. That all of a sudden information started becoming available to right parties, at the right time, at the right cost. This led to a lot of investigations but economically, it caused a sudden collapse in the investment cycle.

But the reality is one of the biggest drivers of our conglomerate model of investment was people getting sweet deals from governments. The moment that stopped, the investment cycle collapsed, that was the cause then. The main cause now, is the fact that two years of slowdown and growth champions in India really don't have any money on their balance sheet. They are extremely leveraged and their leveraged situation has gone from bad to materially worse. Even with the best policies, chances are that those who do the major investments in India are not going to suddenly say, ‘let me put up a new road, or put a new steel plant or something like that.’

It is a very tricky issue; it is not because of policy paralysis. It is not because some great policies are announced, we are likely to see people announcing multi-billion dollar investment plans tomorrow. I think we require a bit more than that.