 "Foreign investors still under-invested in India: Dixit Joshi")
An accommodative central bank, structural reforms and infrastructure spending will boost the prospects for the economy and companies here, says Dixit Joshi, managing director & head of equities, Asia-Pacific, Deutsche Bank. In an interview with Samie Modak, he says the Union Budget has ticked most of the required boxes and India remains largely insulated from global risk-off events. Edited excerpts:
What is your take on the Budget?
It is a very good Budget. About 80 per cent of the items that one had expected are embedded. A set of views will always remain unsatisfied but this Budget continues on the reform path this government set out on from the day it was appointed. It is a pragmatic and optimistic Budget, which recognises some of the nuances that India needs to operate on.
I disagree. What this government has done is give us clarity on policy. You might want a faster acceleration but the path is very clear. Measures like deferral of GAAR (the anti-tax avoidance rule), attracting investment and bringing down the corporate tax rate are all important. What I’d have liked to see in addition was broadening of the personal tax base. The Budget increases the states’ pie of overall tax from 49 per cent to 61 per cent. With the huge amount of capital expenditure, the best place to decide the deployment in the most efficient way is at the state level.
Growth in corporate earnings isn’t coming easy. What is your outlook?
Earnings have been week in the last quarter of 2014. There are a number of reasons. Inflation, which has been the focus of the government and the Reserve Bank of India (RBI), has come off. Earnings have also come off, as a consequence. That’s factor number one. Second, rural demand has been week. I think companies will see margin expansion over the next two or three quarters, helping offset the two factors. Our view is that earnings will grow 17 per cent this year. The market trades at around 17 times, which is about a nine per cent premium to the 10-year average valuation. The nine per cent premium I don’t think is very expensive.
Within emerging markets and even the global frame, India is one of the most attractive stories. It has got the demographic factor. The rate environment is high and coming off fast. You have the government focus on structural reforms and foreign investors who are under-invested here.
Do you think foreign investors are under-invested?
For some time now, India within the emerging market (EM) space has been an outperformer, so EM funds have been overweight on India. However, if you look at broad global funds like pensions, endowments and large mutual funds, all are under-invested in India, which I think will start correcting. Also, the cycle has just turned in terms of investment by domestic institutions. These two will be very powerful catalysts.
Why are global funds suddenly attracted to India?
The past decade took India off the investor map. With his travels around the world, Prime Minister (Narendra) Modi has not only encouraged diplomacy but business and investment at the same time. He has rebranded India as an attractive investment destination, a very big factor in getting foreign funds involved. Across the Asia-Pacific, there are three markets of substantial interest to investors. China, with its reform agenda, Japan due to its monetary policy agenda, and India, which has both. Our prediction is a 75 basis point rate cut in the next six months.
The Budget has eased the tax regime for foreign institutional investors (FIIs). Do you think that will led to an increase in foreign flows?
Offering foreign investors clarity in taxation is very important over the next few years, as that’s been a constant bugbear. The government has been sensitive to the feedback. The signal the government is sending is that we are open to business and will give transparency. To illustrate, our Deutsche conference which opened today attracted a record attendance of investors, which only proves that India can’t be ignored as a part of a global portfolio.
What sectors and themes do you like?
Banks, transportation and power stocks are likely to be the big beneficiaries. A lot of investments are going into that space. Also, information technology, where we are seeing a change in the way India thinks and connects. This government has been very in-sync with the changes. India has hit the sweet spot with the smartphone move. So, that’s going to be a huge enabler here in terms of growth.
Deutsche Bank expects 10 per cent upside from current levels?
My India team has set a Sensex target of 33,000 for this year. I am more bullish. The reasons being a combination of FII under-investment, an accommodative RBI, structural reforms and infrastructure spending. Good spending, with more driven by states, will reduce inefficiences. This will drive future GDP growth and create jobs.
What are the key global risks for the India markets?
A disorderly event in Greece would lead to a risk-off event globally. That said, you have the Eurpean Central Bank (ECB), which will in the next two years buy more than the existing pool of bonds available in the euro zone. So, you have the biggest period of monetary easing, globally, that we have seen taking place in Europe, which will lead to a lot more interest in European assets. Equally, there will be a search for yield, which will lead to attractive destinations like India.
Will the ECB and Japan stimulus find its way into India?
With the combination of really attractive yields, in a world where you have zero to negative rates, a conducive macro backdrop, with expectations of rates going down significantly in the next few years, you will see funds flow to India.
Will there be shocks in the financial market when the US raises interest rates?
There has seldom been a period of change in the rate cycle without volatility. This time could be the same. However, (RBI) Governor (Raghuram) Rajan has firmly indicated when that does happen, India will be in a really strong position. The $333 billion of foreign exchange reserves might seem a good amount for now but the governor has indicated he is aiming higher. With the kind of inflows we are seeing, RBI is doing the right thing in planning for a rainy day.
What is your take on the Budget?
It is a very good Budget. About 80 per cent of the items that one had expected are embedded. A set of views will always remain unsatisfied but this Budget continues on the reform path this government set out on from the day it was appointed. It is a pragmatic and optimistic Budget, which recognises some of the nuances that India needs to operate on.
More From This Section
The Budget lacked the ‘big bang’ reforms the market was expecting.
I disagree. What this government has done is give us clarity on policy. You might want a faster acceleration but the path is very clear. Measures like deferral of GAAR (the anti-tax avoidance rule), attracting investment and bringing down the corporate tax rate are all important. What I’d have liked to see in addition was broadening of the personal tax base. The Budget increases the states’ pie of overall tax from 49 per cent to 61 per cent. With the huge amount of capital expenditure, the best place to decide the deployment in the most efficient way is at the state level.
Growth in corporate earnings isn’t coming easy. What is your outlook?
Earnings have been week in the last quarter of 2014. There are a number of reasons. Inflation, which has been the focus of the government and the Reserve Bank of India (RBI), has come off. Earnings have also come off, as a consequence. That’s factor number one. Second, rural demand has been week. I think companies will see margin expansion over the next two or three quarters, helping offset the two factors. Our view is that earnings will grow 17 per cent this year. The market trades at around 17 times, which is about a nine per cent premium to the 10-year average valuation. The nine per cent premium I don’t think is very expensive.
Within emerging markets and even the global frame, India is one of the most attractive stories. It has got the demographic factor. The rate environment is high and coming off fast. You have the government focus on structural reforms and foreign investors who are under-invested here.
Do you think foreign investors are under-invested?
For some time now, India within the emerging market (EM) space has been an outperformer, so EM funds have been overweight on India. However, if you look at broad global funds like pensions, endowments and large mutual funds, all are under-invested in India, which I think will start correcting. Also, the cycle has just turned in terms of investment by domestic institutions. These two will be very powerful catalysts.
Why are global funds suddenly attracted to India?
The past decade took India off the investor map. With his travels around the world, Prime Minister (Narendra) Modi has not only encouraged diplomacy but business and investment at the same time. He has rebranded India as an attractive investment destination, a very big factor in getting foreign funds involved. Across the Asia-Pacific, there are three markets of substantial interest to investors. China, with its reform agenda, Japan due to its monetary policy agenda, and India, which has both. Our prediction is a 75 basis point rate cut in the next six months.
The Budget has eased the tax regime for foreign institutional investors (FIIs). Do you think that will led to an increase in foreign flows?
Offering foreign investors clarity in taxation is very important over the next few years, as that’s been a constant bugbear. The government has been sensitive to the feedback. The signal the government is sending is that we are open to business and will give transparency. To illustrate, our Deutsche conference which opened today attracted a record attendance of investors, which only proves that India can’t be ignored as a part of a global portfolio.
What sectors and themes do you like?
Banks, transportation and power stocks are likely to be the big beneficiaries. A lot of investments are going into that space. Also, information technology, where we are seeing a change in the way India thinks and connects. This government has been very in-sync with the changes. India has hit the sweet spot with the smartphone move. So, that’s going to be a huge enabler here in terms of growth.
Deutsche Bank expects 10 per cent upside from current levels?
My India team has set a Sensex target of 33,000 for this year. I am more bullish. The reasons being a combination of FII under-investment, an accommodative RBI, structural reforms and infrastructure spending. Good spending, with more driven by states, will reduce inefficiences. This will drive future GDP growth and create jobs.
What are the key global risks for the India markets?
A disorderly event in Greece would lead to a risk-off event globally. That said, you have the Eurpean Central Bank (ECB), which will in the next two years buy more than the existing pool of bonds available in the euro zone. So, you have the biggest period of monetary easing, globally, that we have seen taking place in Europe, which will lead to a lot more interest in European assets. Equally, there will be a search for yield, which will lead to attractive destinations like India.
Will the ECB and Japan stimulus find its way into India?
With the combination of really attractive yields, in a world where you have zero to negative rates, a conducive macro backdrop, with expectations of rates going down significantly in the next few years, you will see funds flow to India.
Will there be shocks in the financial market when the US raises interest rates?
There has seldom been a period of change in the rate cycle without volatility. This time could be the same. However, (RBI) Governor (Raghuram) Rajan has firmly indicated when that does happen, India will be in a really strong position. The $333 billion of foreign exchange reserves might seem a good amount for now but the governor has indicated he is aiming higher. With the kind of inflows we are seeing, RBI is doing the right thing in planning for a rainy day.