Investors should give govt more time: Abhay Laijawala

Interview with Managing Director and Head of Research at Deutsche Equities India

Over the past 12 months, while there have been concerns regarding the government's slow pace of reforms, Abhay Laijawala, managing director and head of research at Deutsche Equities India, while maintaining his 2015 Sensex target of 33,000, tells Puneet Wadhwa that investors must not overlook the strategic changes being ushered in on ease of doing business that will have longer term and sustainable benefits.

How are you/markets interpreting the 12 months of the Narendra Modi-led government? How disappointed are you with the slow pace of reforms? Are the markets over-reacting to the difficulty seen in the passage of the land acquisition Bill and the GST Bill?

The consensus view is that the pace of change is slow and the government needs to move faster. However, we must acknowledge that in India's democratic polity, more than 'shock therapy' and fast paced, big, bang reform, India needs sure -footed, persistent and definitive reform - even if it is gradual. Only this can make the acceptance of reforms, universal and institutionalised.

Consequently, we disagree with the consensus view and believe on balance, the government has been as proactive as it could be, in a constitutional democracy like ours. While current investor focus on a gridlocked upper house holding back GST and the land Bill is legitimate, investors must not overlook the strategic changes being ushered on governance, ease of doing business and surmounting many structural deficiencies, which will go a long way in rebooting India and reviving its economic dynamism.

We would, therefore, urge investors to give the government more time, as many of the changes being made might not result in short-term gains but will have longer term, and sustainable benefits as they percolate through the system.

How do you see the government's reform agenda panning out over the next 12 months? What are the markets expecting to see over the next one year?

Apart from the GST and land acquisition Bills, we would like the government to urgently address investment formation and
lead the way on the same, until the private sector has regained its mojo. India Inc's 'animal spirits' will stay shackled until cash flows led by aggregate demand start improving.

The government must, therefore, pick up the slack created by an enfeebled private sector and emerge as the growth driver. A sharp ramp-up in construction and public expenditure on infrastructure may be the best interim solutions for raising investment activity and driving capital formation. We would also like the government to initiate institutional reforms, including direct cash transfers.

How does India look as an investment destination among emerging markets (EMs), given the macros and the delay in the government's reform process?

International investors remain positive on India's longer term economic trajectory and believe it is among the only large emerging market, where governance and economic reform remain the core investment catalysts.

Following the recent bout of consolidation, valuations have made the risk-reward (ratio) for fundamental investors even more compelling. We remain positive structurally and are reiterating our 2015 Sensex target of 33,000.

How long do you expect the markets to remain volatile?

In the near term, the Indian equity market might remain under pressure, driven by: (i) a tactical revival in equity markets of a few other EMs like China and Russia, which is partially driving incremental flows away from India (ii) delay in translation of an improving macro into micro, i.e., corporate earnings growth.

The recent sharp hike in US bond yields needs to be watched carefully for cues on the rupee, which may come under further pressure if India sees foreign debt investors continue offloading positions.

What are the key things foreign institutional investors will look at before the tide for flows turns back in favour of India?

Investors are primarily looking out for a broad-based economic turnaround, driven by a rebound in investment formation. More significantly, they are looking for the end of the earnings downgrade cycle, where expectations have been belied over the past three quarters. Consensus earnings expectations have moved from a growth of 15-17 per cent after the election to less than 10 per cent. We strongly believe any visible data points on a boost in public investment will emerge as a key catalyst for Indian markets.

When can one expect earnings revival? Which are the sectors, stocks you expect to do well over the next 6 – 12 months? Are there any sectors, stocks you would avoid at the current levels?

Given our expectation of a public investment led economic turnaround, we expect engineering, infrastructure and construction sectors to be the most preferred sectors.