Global investors are willing to commit their dollars to India once again. This would sound like music to the government's ears, considering it has staked its very existence by unleashing a barrage of market friendly “reforms” from early September. Well, to put it simply, this do-or-die strategy has worked because global investors seem to be willing to bet on India and its “idiosyncratic” performance yet again. Till two months ago, this was not the case for reasons that have been written about ad nauseam (plummeting growth, twin deficits, slowing corporate earnings and risk of a sovereign downgrade). The regulatory uncertainty unleashed (read GAAR and retrospective taxation rules) in the Budget document (2012-13) further flashed the red signal for foreigners.
It’s taken the new finance minister less than a couple of months to undo a large part of the sentimental damage caused by his predecessor. While the so-called reforms will take time to play out, what Chidambaram has done is give a sense of clarity to market participants on where the economy is headed. And to achieve this, his trusted lieutenants are doing all they can to reassure foreign investors. The government is spending quality time at road-shows giving details to investors sitting in London, Dubai and New York.
So what are the investors saying about India? Numerous brokerages (domestic and foreign) have organised investor meets outside India to gauge the mood of the foreign institutions on India. The good news is that there is a clear shift in perception as far as Indian assets are concerned, which means that Indian equities are set for another year of positive performance. Citi, which met 60 institutional investors in London recently, says that the initial reaction was skeptical, but seeing the government’s firm resolve to push through key measures like FDI in retail and other sectors, there’s a sense of “acceptance.” Rohini Malkani, India economist of Citi and author of a note on this subject, writes: “Investors admitted that ‘yes, one was caught flat-footed’ and now see (a) growth bottoming out and (b) aversion of a rating downgrade (for now) and early elections.”
Though the sentiment has turned, and the government has somewhat regained its credibility, what will really turn this vicious cycle into a virtuous one is when corporate profitability starts showing improvement and the earnings upgrade start. While this may be a few quarters away, the worst is now seemingly over. For starters, the risk of tailwinds emanating from macro-economic concerns has abated. The worst is over both for economic growth as well as corporate earnings. There is another reason why foreign investors seem to be excited about India. The last one year has shown that corporate India’s earnings are resilient. Despite the regulatory turmoil, policy paralysis and high interest rates, India Inc’s earnings have not been very volatile. Morgan Stanley says, foreign investors want to put money in India because of earnings stability and India’s relative growth: They call it the TINA (there is no alternative) factor. The brokerage says: “It seems that relative stability in earnings outlook has been an important contributor to market performance. This marks such a contrast with 2011, when India was among the worst on relative earnings and price performance.
Unlike in 2011, the earnings trend in 2012 mirrors India’s long-term record in earnings. Over time, not only has earnings growth been comparable with that of the rest of the world, but the earnings stream has also exhibited markedly lower volatility.” If there’s one thing that the market loves, it’s predictability. And that is what corporate India’s earnings are reflecting. Analysts are again veering towards the argument that for this very reason India deserves premium valuation. Willy-nilly an upgrade is likely sooner than later, if investment activity picks up. For those doubting where the equity markets will head in 2013, read on for a detailed lowdown given by finance secretary DK Mittal in London on a whole lot of issues on policy, government and the road ahead. With the government going all out to reassure “global investors,” it’s worth giving equities a chance. MittalSpeak: Edited excerpts from Antique Stock Broking's report on what DK Mittal conveyed in London On National Investment Board National Investment Board (NIB) will be formed by government which will act as a single window clearance for the infrastructure projects above INR10bn. NIB will be headed by prime minister which will ensure fast track clearances for the major infrastructure projects. On pooling of subsidies/scheme Central government is working towards a mechanism whereby it will combine various subsidies/schemes which will reduce the cost of management as well as curtail the cost of subsidies. On capital infusion in PSU banks Mr. Mittal also highlighted that government is committed to infuse capital in banks as and when required. As per estimates, PSU banks will need capital infusion of approx. $20bn in next 5-7 years, which will be met through government budget. It has also set up a committee to assess the capital requirements of public sector banks to ensure that Tier-I capital is at 8% and government holding at 58%, and also prepare them for Basel III capital norms. However, Mr. Mittal stated that banks will also have to work towards improving their efficiencies and enhance profitability so that internal accruals can take care of some capital requirements. On government to address supply side constrains to tame Inflation Serious efforts are underway to address the supply side constrains in order to tame down inflation. The appreciating currency (steep depreciation of INR has lead to 150bps jump in inflation) coupled with base effect will also help and inflation is expected to come down to 6-6.5% by end of this fiscal. On fiscal deficit will be brought to globally accepted levels The Kelkar committee report on fiscal consolidation is submitted to cabinet. Mr. Mittal reaffirmed that government is committed to follow a fiscal consolidation map and will curtail expenditure and will bring the deficits to the globally accepted levels. Subsidies will be directly transferred by the end of this plan and the banking system is ready for the implementation. Government is cognizant of the fact that we have to maintain our rating if not improve it, hence measureswill be taken accordingly. On banking licenses to see light of the day soon Government and RBI are in discussion for the issuance of new banking licenses and the new banking licenses will soon see the light of the day. On joint lending guidelines to be out soon Globally banks share information which helps the banking system from getting over exposed to certain groups. The guidelines for the joint lending are under process and will be out very soon.