G Ananth Narayan, regional co-head, global markets and wholesale banking, South Asia, for Standard Chartered Bank, gives his take on recent global and domestic developments as these affect the markets, in a conversation with Puneet Wadhwa. Edited excerpts:
There have been a lot of developments on the economic and political fronts at the global level recently, such as the (US) Federal Open Market Committee and European Central Bank meets, statements from rating agencies, French election results, etc. What is your interpretation of the outcome?
At a broad level, Europe and especially the US are showing signs of a tentative economic recovery, backed by the huge impetus provided by monetary policy — between the QEs (quantitative easing by the US Federal Reserve) and LTROs (long-term refinancing operations, of the ECB). While the global politico-economic climate remains muddled (Spain, French elections and change of guard), causing bouts of risk-on/risk-off swings, the immediate dire predictions and pessimism of the third quarter of calendar year 2011 have been avoided.
However, we are in the midst of a huge monetary and fiscal experiment. Would the current stress on fiscal austerity and conservative standards, such as Basel-III norms, plunge us into a double-dip (recession) all over again, or are they essential today to prevent eventual inflation and lack of confidence in governments/institutions? The jury is still out on this among experts and we must wait for this debate to play itself out.
How are foreign institutional investors (FIIs) now viewing India as an investment destination?
India tends to suffer from extremes in sentiment. Currently, all we seem to see are dark clouds. A few years back, all we could see was that we are a BRIC country, with enormous potential. The truth is probably somewhere in between. For now, investors are reassessing the positive outlook for India that dominated markets at the start of the year. S&P’s downgrade of the long-term outlook comes against a background of struggling fundamentals and multiple policy uncertainties. Hence, it is likely to add to investor wariness.
That said, this may be the trigger for the government to kickstart the reforms process, address investments in infrastructure and fixed capital formation and, thereby, address fiscal and balance of payments concerns. A transparent implementation of GAAR will go a long way in assuaging investor concerns.
FII investment turned negative in April. Could this trend pick up pace?
The current outlook for portfolio flows is clouded by several factors, including negative capital formation, lower domestic investments, particularly into infrastructure, perceived absence of reforms, uncertainty on tax laws, signs of structural issues on balance of payments and fiscal deficit, and global developments. In the near future, FII flows are likely to stay choppy as global and local factors keep investors cautious. But signs of sustained pick-up in India’s growth or a revival in global risk appetite on the back of QE3-like measures may quickly turn the tide.
How are you approaching India as a market? Which sectors/themes/stocks are you overweight and underweight on?
Market re-rating or de-rating is contingent on a risk-free rate and the risk premium for India. There have been setbacks on both these counts.
There is some expectation of executive decision making picking up after the budget session (of Parliament), which is holding up the markets, apart from what has been a reasonable earnings season so far.
Also, perhaps the market has become overly negative on India over the past few weeks. As we await these broad market signals or lack of it, we continue to prefer consumer stocks and select automobile and information technology names. We also prefer private banks over public sector ones.
What are your reactions and key takeaways from the announcements pertaining to the Banking Amendment Bill and the Reserve Bank’s Basel-3 guidelines?
The banking amendment bill was long pending, so there is nothing unknown about it. The big change is the change in voting rights. However, given RBI’s norm that no buyer can acquire more than five per cent in any banking stock without prior approval, the relaxation of voting rights does not mean much.
While higher capital is necessary today from a system perspective, especially after the experience of the global financial crisis, the implementation of Basel-3 will impact longer-term profitability by lowering normalised RoEs (returns onm equity) for Indian banks, as capital requirements will increase for the entire sector. It will also put pressure on government finances, as some of the additional capital for state-owned banks will probably need to come from the government.
Do you think earnings could get a bump-up over the next few quarters from the Reserve Bank’s stance on rates and the probability of a normal monsoon that can perhaps cap inflation?
Earnings downside is anyway fairly limited now. Our estimates are for Sensex earnings to have a compounded annual growth rate of only 12 per cent between financial years 2012 and 2014, which is lower than nominal GDP growth. A large part of market earnings growth is anyway coming from consumption-driven stocks and banks. That will surely get some support from good monsoons, if not from lower interest rates, and offset the downside risks on industrials or the capex-driven names.
Do you think the rupee and crude oil prices could swing favourably for the markets over the next few quarters?
While the overall balance of payments situation is likely to stay weak for India in 2012 as well, a relatively better second half due to growth expectations bottoming out, stronger risk appetite and a relatively stronger dollar could turn around the dollar-rupee exchange into the year-end. Once the fundamental backdrop improves, especially on investment growth, carry and valuations would also aid such a move.
Crude prices may trend lower in the near future on weak global growth and, hopefully, a lower risk premium from the Middle East. However, they remain a potential source of concern over the medium term.
