Time for govt to sort out mess in PSBs, says Chris Wood

With the passage of Real Estate (Regulation & Development) Bill, Wood has added Prestige Estates in his Asia ex-Japan long-only portfolio and trimmed stake in RIL, Bharti Infratel

With the outcome of the recently held State election stamping Narendra Modi - led National Democratic Alliance's (NDA's) dominance, Christopher Wood, managing director and equity strategist at CLSA has said in a note that it was time for the government to also sort out the mess in the public sector banks (PSBs) before the demands of the political election cycle take priority again.

The odds, according to Wood, still favour a Modi re-election in the general election in 2019, though the key political test will be the state election in Uttar Pradesh in April 2017. He also expects recapitalisation plans for the PSBs to be announced soon in a hope that the banks are cleaned up by March 2017.

"Such an outcome would be extremely constructive and would contrast significantly with the failure so far of China to address its rising systemic NPL (non-performing loan) risk proactively. Deleveraging is much more real in India than in China as reflected in the fact that credit growth is running in line with nominal GDP growth in India whereas in China it remains well above," Wood says in his note.

With the passage of Real Estate (Regulation & Development) Bill, Wood has added Prestige Estates in his Asia ex-Japan long-only portfolio.

As per the Bill, developers will now have to keep 70% of pre-sales cash-flow in an escrow account until a project is completed. This, Wood says, is critical for confidence in an Indian housing market where many projects have been "stuck" in recent years, leaving would-be home buyers who have paid instalments on a property which has never been completed with no redress against the developer.

The above reform, according to him, should create real barriers to entry for the residential property market since only developers with the necessary strong balance sheets will be able to sustain such a business model.

"In the hope that the relative doldrums in the residential property market in India are in the process of bottoming out GREED & fear will again introduce an Indian property stock in the Asia ex-Japan long-only portfolio. An investment in Prestige Estates will be reintroduced with an initial weighting of 3%. This will be paid for by shaving the existing investments in Reliance Industries (RIL), Bharti Infratel and Universal Robina by one percentage point (1ppt) each," Wood says in the note.

As regards the road ahead for the markets, Wood had recently suggested that India, in relative terms, is likely to continue to underperform in Asia and emerging market context if the weak dollar - long oil and related long commodity trade continues to play out and cautions that the valuations in India are not cheap.

Despite this, Wood believes that investing in India also remains the most effective way of diversifying from China risk in an Asia or emerging market portfolio; and says he not giving up on the long-term equity investment story in India, nor should investors.