Experts see extended bull market in India; strong earnings

Sinha: We are in a bull market and not just in India, what we are seeing in India is largely inline with what we are seeing globally. So all economies particularly the similarity is most with the US where the markets have been in a rally for a few years as they have been in India.

Indian economy, the difference between US and India is that the US economy has already turned the corner and the numbers coming out of the US GDP and earnings from companies are pretty good. They are already showing an improvement; in India we still have to see that improvement. We haven’t seen a big turning point on the corporate side or on the GDP side; we have seen a little modest improvement.

So, that is the difference between India and some of the other market but definitely this is a liquidity driven rally that is helping many markets.

Bhattacharya: Would you say that this is going to be a bull market all things being as they are as they stand now which will be pretty extended, in other words that will last for the next three to four years?

Shah: Bull markets typically last for periods of five-seven years. That has been a typical cycle which Indian markets have always experienced. So if you look at the markets, they make significant tops every seven-eight years and every top is significantly higher than the previous one. So I clearly believe that bull markets don't end with six months or one year or one and a half year's of upmove. It is a market which goes on for quarters and for years. However, what could make this bull market more special is the fact that the kind of political mandate which this government has got is unprecedented in the last 30 years. Therefore, this bull market could probably be even more extended than the ones that we have seen in the last 10-20 years. To that extent, I don't think this is a bull market which is going to be short-lived. It is going to be an extended bull market which is something which is going to last for several years.Kela: Government can do a lot and the hope is that they will do a lot. The initial signs which one has to read that they are going very systematically about it. I would be very nervous if Narendra Modi came and the 15th day there wi3l be big bang announcement that we did this, we will do this, I would be very nervous.To my mind the patient has gone into ICU and when you come out of ICU you don’t put steroids and make him run. You first examine what all has gone wrong and then you systematically treat him. I think last three to five years have been pretty bad let's accept that whether it is relating to policy or whether it is relating to enthusiasm or confidence, it has been very bad. So, I think the first thing I would like to see from our market perspective that we have roughly Rs 10 lakh crore which are blocked in projects whether it is power sector, whether it is road sector, whether it is selective ports, whether it is mining and that is clearly a factor of government confidence and the policies which will be mend. Once this money gets unlocked then that’s what will lead to incremental corporate profitability.

Bhattacharya: I assume that you are in agreement with what Nilesh said that we are in the midst of a bull market that has legs and will go on, assuming that that is the case, if you had a wish list and you could go and tell Finance Minister, Arun Jaitley this is what I would like you to do - the three most important things in my view, which will make this sustainable, what would those three things be from the viewpoint of the equity markets?

Holland: I am not sure, I will tell FM Jaitley the three things but the three things I think, are happening which I would point out to him are - I do believe we are in the bull cycle similar from 2003 to 2006-2007. I think the difference this time around is that it is not going to be a service led growth economy, it is going to be domestic led economy and that will be very powerful in terms of earnings.The second point is I have been speaking to a lot of high networth individuals (HNIs), to business people and for the first time in years I have heard people saying, ‘I am proud to be Indian’ again. It is a very powerful statement. I don't remember this in India but I don't remember it till I go back to my days in the UK under Margaret Thatcher when that belief and commitment to change was thereI think the third point I would make is that, I am meeting foreign companies here, the statement that they are making which is very powerful is that globally all eyes are on India because they see it as it has been the engine of growth away from China and that is a big difference from 2003 to 2007. So if the GDP growth can grow from 5.5 percent to 7 percent over the next few years, we will see operational gearing come into India and the earning story in India is just beginning. So those are the three things I would tell our finance  minister and please don’t interfere.Bhattacharya: If I could, just to take that one step forward and since you articulated these and I think absolutely rightly so, what is it that the government can do to facilitate these trends that you have identified or is it all sort of in the hands of market driven resource allocation, there is nothing -- if the government just leaves things alone, it will be prefect, is that your view or is there things that the current government can do that will help to get full benefit or to catalyse these trends that you have identified?Holland: I think we all know all the reforms that need to be implemented and I think after the recent reforms, all will be saying ‘big bang’ reform should come, I think if the government can keep the momentum going, just the momentum of reform, it doesn’t have to be ‘big bang’, it can be incremental but the momentum of reform is going, this confidence both locally and globally will continue to fire the GDP growth for India.Bhattacharya: Would you like to take on that same discussion forward in terms of if you had a wish list of things that you were seeking or looking for the government to do that you think would help to make this bull market more robust and more vibrant, what would those two-three things be?Kela: I reaffirm again that we are clearly as the prices are indicating and whatever our experience of last 20 years is, we are clearly in a bull market. Markets have not even corrected 10 percent at one point since it made a bottom in August of 2013.

This is one of the characteristics of the market - participation, scarcity of stocks, people getting into the greed cycle and coming out of the fear cycle. These are characteristics which you look apart from valuation and stuff like that.Bhattacharya: It also goes to Andrew Holland's point about the self belief. Ensuring that people begin to believe or they have the confidence that things are headed in a way that is positive.Kela: Yes. So, this is one very important thing. Second, wherever there is huge potential in the industry, like we don’t need to import iron ore. So, wherever there is tremendous potential that India has we would like to see very progressive policy. What happened in coal I think they have done a fantastic job, neat, clean ordinance has come, coal auction is going to happen. So, likewise we would like to see lot of policy measures in other sector, in industries where India has latent potential. In def t experts hope for policy measures in areas having latent potential.Mkt experts hope for 25 percent earning growth in broader indicesence the first step has been taken but there is lot which the government can do and I hope will do to ensure that our defence imports significantly goes down. Those are the sorts of things I would look at. We would like to see things being done in a manner which will clear up. If this market has to sustain then we have to believe that it may not be in 2014-15 but in 2015-16, 2017-18 there is going to be at least 25 percent kind of a earning growth in the broader indices and that’s what can propel the index to a much higher level.

_PAGEBREAK_

Bhattacharya: There has been tremendous good luck, oil prices have come down so it helps the macro situation vastly, it has nothing to do with anyone’s capability and then commodity prices have come down. That is another big positive for a country like India but do you think on balance that the ability to get the macro economic picture back on track to where it provides a huge amount of confidence especially to international investors is something that can be achieved within the next 12-18 months because if you look at what has happened for instance this year I mean the fiscal deficit still seems very worrisome. They spoke about divestment we have not seeing a single divestment as yet. Rs 60,000 crore was the number they spoke about. We haven’t seen one rupee of that. Sinha: The international investors are looking for growth right now. There are very few places that are offering much growth. I mean Europe is struggling if you look at it only two economies in Europe that have delivered growth UK and Germany their stock markets have rallied a lot. US has delivered growth but that stock market has rallied a lot. What is different this time is that emerging markets as an asset class have always offered a lot of growth. However within emerging markets this time around amongst the large four, amongst the BRICS is really India that is standing out. Brazil and Russia are having their own set of problems. China is till growing but it is decelerating, India has decelerated but is likely to accelerate and so amongst the large four emerging markets and as an asset class those who invest in global equity. US has already done quite well and it is probably still one of the large allocations. Europe as I said it is a mixed bag; then they look at emerging markets. Within emerging markets some of the large economies where will they go? They will go to India right now because relative to everything else out there India is still looking pretty good on absolute and relative basis versus the other economies. Bhattacharya: Nilesh would you say that enough has been done or signals have been sent out that makes you believe like Punita seems to suggest that yes, this will happen? Shah: Yes, the government has been actually pretty careful in terms of what it says. Clearly the government believes that rather than just speaking and letting words out it is better to act first and let your actions really speak rather than just words. This is a key difference between the approach of this government versus the approach of the previous government. You actually see very senior ministers really say that “a reform is the art of possible”. This government is going about in a very systematic manner where they are really trying to pluck the low hanging fruits and so initially they have gone ahead with things which do not require legislative approval which means that doing away with a lot of procedures, trying to kind of prepare a list of laws which are outdated which need to be repelled and then after that they are going in for now some of the really big things. There are already indications that both goods and service tax (GST) and amendments to the land acquisition act are on priority. The labour reforms which the Rajasthan Government has started have been approved by the President and may be this will become a role model for the other states to follow. It is a fantastic blend of what needs to be done by the central government and what probably can be done by the state government and pushed above and can be replicated by rest of the states. It is a good start and in the next six months you probably going to see a lot more not just noise but a lot more action and a lot of outcomes and results of these initiatives. It looks very clearly that for the next may be six to nine months the focus will be on areas like GST, land acquisitions, labour reforms and that is going to be very good for corporate India and for entrepreneurs because if you really look at it we all know that there are four factors of production for any firm or enterprise and these initiatives really try and address those very issues. Having started with that the next focus would be on the various infrastructure projects Bhattacharya: If you look at the market right now it is a very two tier market I mean you have got a bunch of must have eye loved stocks trading at 40-50 times forward earnings. I am not talking of this year which is really exemplary in terms of what it says about the mindset of investors and their thoughts about the future and the word that describes this mindset is buying quality. Actually I think what it says is we have no confidence in the investment cycle. Do you think it is important that we look for signs that the capital spending and investment cycle is going to revive because we haven’t yet seen signs of it? Five months down the road there are no signs that corporate India believes they need to kickstart investing? Holland: First of all why do they need to? Manufacturing capacity utilisation is running around 50-60 percent. So, even as the economy grows they can put their stuff through the factories without having to build. So, it is a two year cycle before we start to see capex by corporate India coming in. What I think will happen is that the government as Madhu kind of mentioned as well will kickstart these stalled projects across the country and we know that the multiplier effect on the GDP growth will start to propel that and then you will get again build on the confidence and if the momentous reforms which we have heard about continues then the foreign investment will follow. As Punita said everyone is looking for growth around the world and India is giving you that and the global people I mentioned are saying all eyes are on India. So, I don’t think we need to say capex cycle is a confidence factor. I think the confidence factor is there and now as you see more throughput go through the economy and through to the manufacturing their cash flow will boom and avail to invest more and that is what will happen this time around. So, I am not looking at the capex cycle because that is two years down. I am looking at what is going to happen in terms of the government kickstarting the economy and then you get the multiplier effect and then coporates will start to benefit from that in terms of manufacturing. Bhattacharya: Madhu your thoughts on that interesting hypothesis, not conventional thinking clearly different this time so how do you look at this? Kela: Capex cycle as I said from where we are coming looking at the corporates and their balance sheet it is unreasonable to expect also that they have the balance sheet, the risk taking ability and the resources itself to kickstart the capex cycle. However let's not forget ultimately entrepreneurs are also human being and they also go through the same greed and fear cycle. So what we experienced 12 months back when people were wanting to pack up their bags and may be settle out of India, lot of entrepreneurs I know they were planning to do that, lot of professionals were trying to do and that whole cycle is returned. Everyday you hear that someone wants to come back here not someone wants to go. So I am not terribly worried about it as long as we are just getting into the right path and the policy orientation is there I am not terribly worried about that. It will happen. However, they say that in a market this time around to my mind what is really different is the returns are getting frontloaded. The most important point which I want to make is that we are in early stage bull market but lots of companies are already trading at 30-50 PE multiple. So, we may actually have a situation wherein the growth will last for five years but all the returns might be made in the next two years rather the majority of the returns might be made in the next two years wherein there will be a lot of feel good like what happened in China. They were still growing at 9-10 percent GDP but stock markets is not giving you that return. So, you need a lot of good feel which will be around but I don’t know whether you can go from 50 multiple to 150 multiple.