 "Christopher Wood")
Despite being overweight on Indian markets, Christopher Wood, managing director and equity strategist at CLSA, believes re-capitalisation of banks and addressing the high level of non-performing loans (NPLs) in the system should be a priority of the Narendra Modi government.
Wood is concerned about the government’s lack of urgency in addressing issues relating to the sector. According to him, these issues are more important than implementation of the goods and services tax (GST) Bill.
Also Read: 'I remain overweight on Indian markets'
The NPL issue in the banking sector is delaying the capex cycle recovery in India and is also likely to make monetary easing less effective, he said on the side-lines of the 18th CLSA India Forum.
“The question is whether Modi wants to priorities the banking issue or not. Assuming the level of stressed loans at 15 per cent, it remains a constraint on his desire to create investment-driven growth.
“What is delaying the re-capitalisation of state-owned banks (SOBs) is that the government doesn’t want to reduce its stake in them below 50 per cent. From a textbook standpoint, all bad loans should be put into one bad bank and then let investors bid for those. That’s the quickest way of solving this problem from a free market perspective,” said Wood.
Adding: “On the other hand, the government and the RBI (Reserve Bank of India) are increasing pressure on SOBs to own up bad loans. Going ahead, there will be more red ink that can lead to consolidation in the banking sector. Since the government hasn’t sorted out the problems with the banking sector, we are unsure as to when the capex cycle will recover.”
Earlier, a CLSA report on banks co-authored by Aashish Agarwal, Prakhar Sharma and Akshat Agarwal had pointed out that while asset quality pressures might stay elevated in FY16, those might taper off thereafter.|
Wood is concerned about the government’s lack of urgency in addressing issues relating to the sector. According to him, these issues are more important than implementation of the goods and services tax (GST) Bill.
Also Read: 'I remain overweight on Indian markets'
The NPL issue in the banking sector is delaying the capex cycle recovery in India and is also likely to make monetary easing less effective, he said on the side-lines of the 18th CLSA India Forum.
“The question is whether Modi wants to priorities the banking issue or not. Assuming the level of stressed loans at 15 per cent, it remains a constraint on his desire to create investment-driven growth.
“What is delaying the re-capitalisation of state-owned banks (SOBs) is that the government doesn’t want to reduce its stake in them below 50 per cent. From a textbook standpoint, all bad loans should be put into one bad bank and then let investors bid for those. That’s the quickest way of solving this problem from a free market perspective,” said Wood.
Adding: “On the other hand, the government and the RBI (Reserve Bank of India) are increasing pressure on SOBs to own up bad loans. Going ahead, there will be more red ink that can lead to consolidation in the banking sector. Since the government hasn’t sorted out the problems with the banking sector, we are unsure as to when the capex cycle will recover.”
Earlier, a CLSA report on banks co-authored by Aashish Agarwal, Prakhar Sharma and Akshat Agarwal had pointed out that while asset quality pressures might stay elevated in FY16, those might taper off thereafter.|
Stance on India
On rate cuts, Wood expects RBI to cut rates by 200 basis points (bps) in 2015-16. Despite the challenges, he remains bullish on India from a five-year perspective.
“India has been a triple overweight since Q314 (third quarter of FY14). This large overweight will be maintained. The view is that the economy is in the process of bottoming out along with earnings, while there are rising hopes that the policies introduced by Modi will serve as a catalyst to trigger a new investment cycle in his five-year term. Meanwhile, more monetary easing is anticipated even though there have been 125 bps of interest rate cut this calendar year. It is particularly encouraging that the rupee has been relatively stable against the US dollar,” Wood added.
Given this backdrop, his portfolio doesn’t consist of high beta cyclical stocks right now, but prefers to stay with quality stocks.
Global allocation
According to Asia Maxima, a quarterly review and asset allocation note for FY15 fourth quarter co-authored by Wood and Joe Man, besides India, CLSA remains overweight on Japan and the Philippines; marginal overweight in Taiwan; underweight on Australia, Hong Kong, Singapore and South Korea; neutral on Indonesia and China; and has an out-of-the-index bets in Vietnam.
According the report, Maruti Suzuki, HDFC Bank, IndusInd Bank, Power Grid, HDFC, GRUH Finance, Larsen & Toubro, Bharti Infratel, Zee Entertainment, Bajaj Finance, Prestige Estates and Persistent Systems are the stock picks in CLSA’s Asia ex-Japan thematic equity portfolio for long-only, absolute return investors in the Indian context.
