From a foreign investor standpoint, India’s equity market continues to represent a long-term opportunity. There are pull and push forces at play and the push forces reflect investors’ outside-in view of the world markets. Europe, and to a degree Japan, continue to present long-term structural problems. The legacy money in these regions will seek emerging markets as they represent strong relative growth. Other push forces, such as flat to negative gross domestic product (GDP growth), low interest rates, entrenched entitlement cultures and weak behavioural drivers underpinning sluggish economic activity are becoming endemic to these old world powerhouses. Here, India enjoys directional, demographic and entrepreneurial comparative advantages.
However, while India has some attractiveness, the near to medium term is fraught with risk.
We find high political and economic risk with moderate social risk in India. Much has been written on policy paralysis and weak governance. In the absence of any triggers, we see status quo until the 2014 elections — a clear political risk. The risks are somewhat mitigated by islands of good governance at the level of states (Gujarat, Bihar, Rajasthan and Goa, to name a few). In turn, this represents stock picking opportunities where companies plugged into ‘positive state’ ecosystems could outperform peers.
On the economic front, there are simmering problems. The triumvirate of volatile markets, foreign exchange risk and regulatory flakiness on top of sliding GDP, rising fiscal deficits and low confidence in the government do not add up to a pretty picture. Recent regulatory announcements have been more in the nature of pronouncements, even as the uncertainty around implementation has struck fear in the hearts of foreign institutional investors (FIIs). This will slow down FII liquidity. Clarifications on the General Anti-Avoidance Rules (GAAR) are a step in the right direction but more clarity is needed. Inflation has chipped away at the consumption story and savings rates are heading south. The recent rate cut has come without a clear monetary policy direction and is unlikely to spark an investment-led growth cycle. But all these are akin to cobwebs that gather in a room seeing no activity. These can be dusted away and sentiment reversed in three months if the government demonstrates the will to act constructively. Why? Because India’s fundamentals and economy are intact.
So, can India’s equity markets deliver premiums to compensate for the higher risk. The answer, in the short run, is ‘no’. Yet, the capital market still represents an opportunity for investors to generate real (inflation-adjusted) returns over time. So, while the secular trend is bearish, there will be attractive sectors and stocks. Investors should seek high-quality managers of money who are geared to deliver risk-adjusted real returns.
The author is MD, Ada Investments, India
