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While foreign investors maintained faith in the structural strength of the Indian economy through the cyclical downturn, it is good to see domestic investors coming back to equity markets. While the markets are likely to consolidate their gains in the near term, we have a long way to go as India is still in an early stage of a structural long-term bull market.
The government has introduced symbolic initiatives such as Clean India and Make in India, which set the path of improving India's ranking on parameters such as the Human Conditions Index and ease of doing business. There would be focus on priorities such as general hygiene, higher literacy, skill development, financial inclusion, e-governance driving efficiency and compliance and infrastructure improvement, while steadily introducing structural reforms such as a national Goods and Services Tax and changes in land and labour laws. There is a clear thought to leverage the full potential of India's demographic dividend by improving the social infrastructure, skilling young people and creating jobs that would lead to higher disposable income and spending. Setting the stage for a larger and longer virtuous economic cycle.
Multiple steps, such as diesel deregulation, decision on gas prices, minor labour reforms, business-friendly compliance practices, and initialising a transparent and fair policy for coal mine auctions have been well navigated. Construction sector foreign domestic investment norms have also changed favourably, with focus on affordable housing. These initiatives would gain momentum in the backdrop of recent political gains. Softening of global commodities has reduced fiscal pressure, while improving the odds for a policy rate cut earlier than anticipated.
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We must reckon that the world isn't in great shape. Geo-political risks abound, with West Asia and Russia-Ukraine still vulnerable. Sustained low crude oil prices could potentially invite geopolitical risks not envisaged now. The eurozone, Japan, China and several other emerging economies are struggling to keep the growth momentum on. With Quantitative Easing (QE) expected from the European Central Bank after the surprise 'QE Bazooka' from the Bank of Japan, markets would respond to global money flows. However, it also shows the underlying fragilities in a large part of the developed world. Global markets could witness higher volatility in 2015.
The corporate balance sheet in India seems in good shape but beneath it is a big divergence with a section that is quite strained. We also have to reckon the possibility of large supply of equity issuances in the short term, which can absorb a good part of incremental flows.
Corporate profit growth is likely to revert to 16-17 per cent annually for five years, while a valuation of around 16 times is in line with historical averages. We expect revival in the investment cycle, driven by infrastructure spending, followed by private capex at a later stage. We remain positive on the backdrop of a better outlook on economic variables, earnings outlook and continued liquidity flows.
The "way of doing business" is undergoing a shift, with a new model of natural resource allocation, impact of technological changes and greater connectivity, with a more agile, informed and demanding customer. There are multiple growth drivers at play such as revival in manufacturing and exports, growth in consumption at both the higher end (premiumisation) and at the bottom of the pyramid, penetration of technology with higher connectivity and improvement in farm productivity that will open new frontiers for businesses. This is a new growth cycle for India and there would be another set of players that can gain scale in revenues and profitability, who have established the right business model to capitalise on upcoming opportunities. While keeping an eye on macro developments and identifying emerging themes and shifts, our greater focus remains on bottom up stock picking. We believe, this is the best way to generate alpha on a sustainable basis.
The author is CIO - SBI Funds Management Private Limited
