G Ananth Narayan, regional co-head, global markets and wholesale banking (South Asia), Standard Chartered Bank, in an interview with Puneet Wadhwa says the reform measures announced by the government last week will have a positive medium-term impact on the economy and will change the perception of policy paralysis in India, but may not have an immediate effect on growth. Edited excerpts:
Have the recent economic developments and the actions of various central banks made you cautious in your approach?
I think there is significant attention and resolve being shown by authorities — the central banks, public officials and politicians — on addressing the issues confronting the global economy. Obviously, consensus is not easy to come by, preferred prescriptions vary, and decibel levels can be high.
However, there seems to be a growing sense of urgency that steps need to be taken to resolve issues surrounding sovereign debt in Europe, preserving the euro, addressing global unemployment and low growth, and perhaps eventually, addressing the impending US fiscal cliff.
Given that corporate and individual balance sheets have improved particularly in the US, land prices are low and labour is available in the West, and the unfolding of the shale gas story (albeit still in its early days), I believe there is some room for cautious hope and optimism, despite the obvious risks.
What are your biggest worries on the macroeconomic front that can upset this rally in the global equity markets?
The known issues are large, the impending US fiscal cliff, European sovereign debt and possible growth slowdown in China. However, given the amount of attention and focus these issues are attracting, it’s probably fair to assume as a base case we will muddle through on these.
The risk, to my mind, are probably from matters like will commodity price inflation flare up on the back of sustained loose monetary policy and complicate policy options, as it already has in India.
Do you expect a hard landing for the economic growth in China?
China is a surplus nation and has funds to invest in various global asset classes. Their investments into European sovereigns, by themselves, should not be a cause for concern. There is some debate though, on the future trajectory of growth in China.
Consensus seems to be veering towards a slowdown and the debate centres around whether it will be a soft or a hard landing. There is impending political change there as well, and the market will likely remain nervous on the China growth front. However, as a base case, we do not expect a hard landing to unfold in China.
What about India?
In the case of India, the slowdown in infrastructure growth and investments is the single biggest macroeconomic area of concern. We need these investments in infrastructure to sustain the India story, to increase capacity and supply, and to create jobs. Also, it is acknowledged that economic policy probably has a larger role than the monetary policy in this process. We need policy intervention to ensure infrastructure projects can take off in a sustainable manner.
While the Reserve Bank of India (RBI) will likely continue to worry about inflation, perhaps it could pursue a two-step monetary process. One, allow banks to refinance their lending to critical infrastructure investments at attractive rates, such as the LAF repo rate. Much as it does in the case of the rupee export loans (where refinance at repo rate is available for 50 per cent of the loan), this could ensure that funds flow into much needed infrastructure investments, at meaningfully lower rates.
Two, they could continue to keep the rates and risk weights high for other consumption oriented loans, to address concerns on inflation.
How do you view the monetary policy statements by the RBI?
The high inflation print and fear of QE3 lead further commodity inflation deterred rate cuts by RBI, but we welcome its steps to improve liquidity with a cash reserve ratio cut. Perhaps RBI could further foster infrastructure investments by providing a refinance window for banks against infrastructure loans.
What is your view on the recent reform/policy measures announced by the government? How do you see the Indian economy panning out in this backdrop?
While India's macro backdrop remains challenging, Standard Chartered believes these measures will have a positive medium-term impact and will change the perception of policy paralysis in India; they may not have an immediate effect on growth. Standard Chartered has revised down the GDP (gross domestic product) growth forecast for FY13 to 5.4 per cent from 6.2 per cent, as investment activity has not picked up in the first half of the financial year and consumer spending is slowing.
So, there are uncertain times for the markets going ahead?
As long as India’s growth story remains under a cloud, we will remain vulnerable to bouts of volatility in our forex/fixed income/equity markets, even though the long-run prospects warrant confidence. And, as long as markets wobble, Indian companies which have high leverage will remain vulnerable, as will the banking system. Hopefully, while we set our house in order, the global context will remain benign.
In May, you said you preferred banking, information technology (IT), automobile and consumer sector stocks. Have you changed your preferences and allocations since then?
The Standard Chartered equities team has a neutral weight on banking and prefers select private sector banks with greater proportion of retail assets over the public sector banks as bad assets appear more like a journey than a short cycle.
In IT services, they are more positive on the tier-II names as some of these companies are growing much faster, increasingly participating in new deal bids and have more margin levers. Though our equities team feels more comfortable with staples, risks on the discretionary side of consumption makes them cautious on autos now.
How do you see the mining and the metals sector shaping up (globally and in the Indian context) over the next few quarters?
Our commodities team was projecting iron-ore surplus scenario in the coming years. So, in the context of a slowdown in China, this production cut and capex deferment is not surprising. India is self sufficient in iron ore and we only need some processing capacities. Much of that capex is already in the pipeline and in the coming years they will be commissioned. For most of the commodities, be it aluminium, copper or iron ore, our team sees upside from present levels and the production cuts will support the prices.
If one were to invest from a three-year perspective, which sectors/stocks according to you could outperform the markets?
We believe multi-category FMCG companies that have products across various price points to be well placed to capitalise on the changing consumption patterns and uptrading that is taking place, notwithstanding the macro risks to a consumption slowdown.
We are also positive on cement as a proxy on infrastructure build-out vis-à-vis the pure play infrastructure names given the uncertainties associated with the policy and the long time it could take to resolve it. In contrast, we believe cement is at the beginning of an upcycle.