While the Indian economy seems to have lost a golden opportunity to accelerate growth, there is a strong possibility that the capital markets could reclaim their previous peak by the end of the financial, if not the calendar, year. In a world of collapsing growth, India stood out with two advantages. One, it has a banking system insulated from the reckless investment practices that have returned to haunt every major bank in the Western hemisphere. Two, the strong bedrock of domestic consumption was expected to enable the economy to navigate its way in an environment of weakening global trade. Further, there is room in India for a big push to infrastructure, the lack of which is leading to inefficient utilisation of capital.
An evaluation of trends in liquidity, valuations and events suggests that unless we are hit by a major economic accident, the market’s bias will be upward. The strong surge of inflows of Rs 44,000 crore in January-March 2012 suggests India remains a favoured destination whenever global capital chases equity, particularly emerging-market equity. This trend suffers a setback whenever risk appetite declines, as it did in April, when we witnessed a net outflow of Rs 1,109 crore. This would have been just a blip had it not coincided with the confusion created by the proposal to introduce GAAR, which turned sentiment against India. This is now slowly reversing, as is evident from the net inflow of around Rs 10,273 crore in July. No doubt this is triggered by the expectation that policy making will improve. With a new finance minister in place perceived to be pragmatic and sensitive to global perception, this is likely. Besides, India is currently under-owned in the portfolios of many active global fund managers. The reba lancing of the MSCI Emerging Markets Index will also raise India’s weight from 6.41 per cent to anywhere between 7.2-8.73 per cent. All these factors should drive strong flows into India.
Compared to its own history, India’s current price-earnings ratio of 13.16 and 11.8 (for FY13 and FY14, respectively) is at a level where historically the markets have often found support and bounced back. These estimates have been arrived at after a number of downgrades. Therefore, the possibility of upward revision is higher than the risk of further downgrades. Truant monsoons, however, are a cause for concern.
Events pose the biggest risk to this market outlook. On the domestic front, policy paralysis has to be overcome. Smart politics drives economics. Have we not seen minority governments at the Centre and in the states deliver? So, why can’t a coalition? Did the UPA not manage its allies in the Presidential election? Why can’t it do the same on economic issues, such as foreign direct investment (FDI) in retail, the Insurance Bill, GST and several others? The political compulsions of delivering in the run-up to the next general elections should see appreciable economic activity where almost none has been visible in the last several months. On the global front, the problems that have been simmering for a while may not climax for the next few months. This should provide a window for liquidity flows, earnings revisions and PE re-ratings, provided domestic policy is supportive. The Indian market could, then, well reclaim its previous peak.
The author is founder, Citrus Advisors