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    Market euphoria may fade unless Modi moves quickly to fix the economy: Krishna Memani


    The election results were not exactly as we all expected, says Memani.

    Again, the overall trend growth rate everywhere is slowing down. So, the earnings growth challenge is going to be with us for quite some time, but the markets are long-term discount vehicles.
    The initial euphoria in the Indian equity market may fade unless Prime Minister Narendra Modi comes up with definitive ideas to address the economy, Krishna Memani, Chief Investment Officer, OppenheimerFunds Investments at Invesco, told In a phone interview from the US, Memani said that he would rate Modi government’s performance on policies and reforms in their first term at 4 out of 10. He emphasised that it was imperative to implement policies that will get the economic growth rate to a higher level.

    Edited excerpts:

    What are your thoughts on the election results?
    The election results were not exactly as we all expected. We expected Modi-led NDA to have the majority, but this sort of victory, I do not think anybody really expected. So, it is a golden opportunity for the Prime Minister to make the second term all about the economy. Whether he rises to that challenge or gets bogged down in politics and siyasat is the choice he has to make.

    What does it mean for the Indian stock market?
    Well, for the stock markets, at least initially, it is very very positive. That means that the likelihood of an inclusive economy agenda coming back is quite real. At the end of the day, that probably gets the Indian economy to grow at a level that is comparable to what China did over the last two-three decades. But that hope and expectation will start fading relatively quickly unless he comes up with really definitive ideas as to what he is going to do and how is he going to go about addressing the economy. It is initially positive for the market, and on that positive hope and momentum, we will probably see a lot of flows coming into India and that would support the stock market. But again, it is contingent on him making a commitment with respect to actual policies and people. If that does not happen in six months time, all of those flows would be reversing.

    Would you buy Indian stocks at this moment?
    If you have a 10-15 years investment horizon, you would buy Indian stocks. If you have a two, three, six months investment horizon, probably not because Indian stocks are not cheap relative to stocks everywhere else. This election certainly has given it another boost. So, they are not cheap assets but if you have a view on the long-term growth outlook of India and long-term growth outlook for emerging markets in general and India, in particular, you can buy them but do so for a really long investment horizon rather than a trade.

    Are you adding India to Oppenheimer’s portfolio at this point of time?

    No. We do not really talk about what we are doing in our funds but we really have not been adding Indian stocks, again for the reason that we have some really good long-term holdings in India and we continue to hold on to them but Indian stocks today are not of as much value as other parts of emerging markets.

    You also hold Indian midcap stocks in your portfolio. The Indian mid and smallcap stocks have not really performed well over the last one-one and a half years. Is there value in that space?
    There are some really good companies in the Indian mid and smallcap sectors and we want to focus on those companies because we think we have a competitive advantage in terms of analysing the prospects of these companies. Most of the flows that go into India are country level flows and they continue to focus on largecap companies and that is where the valuation is probably the richest.

    Valuations of small and midcaps are much better and the prospects of some of those small and midcaps to become largecaps in 5-10 years is quite good. So, we are focussed on those types of companies as opposed to the sector itself.

    Which sectors do you like in India at this point and why?
    The sectors that we like in India are those that we think will continue to do well as the Indian economy grows. We like private banks and finance companies because the financialisation process of India is going to be an ongoing one. We like the technology companies because they are good exporters and their outlook remains although valuations are not as cheap as they were before. Their prospects are still pretty good and we think as growth stabilises on a global basis in the second half, they will probably do well. It is really more about specific companies than about sectors and capitalisation.

    Which sectors would you steer clear from at this point of time?
    The consumer sector is extraordinarily rich and those have decent growth prospects. Valuations are extraordinarily high and that is where people with country-specific flows focus on. We think the upside in those sectors from a long-term perspective is really not as much as it is for other parts of the Indian economy.

    What are your thoughts on the ongoing NBFC crisis? Could it deepen further? Do you think a solution could be coming up for this?
    This is something that Mr. Modi has to get to in a hurry and I believe he will because he recognises what the downside is for the overall economy in general and the rural economy in particular if the NBFC crisis continues. The problem with the non-bank finance sector can turn into a real catastrophe for the less well-off part of the Indian economy. From consumption and investment standpoints, these issues have to be addressed quickly and head on. I think he will do it.

    What are your thoughts on the state of Indian economy? What is your reforms wish list for the new government?
    The state of the Indian economy is decent but it could be a hell of a lot better and the tragedy of the whole situation is that a lot of the problems are somewhat self-inflicted. It is because Mr. Modi, in the beginning, talked a lot about the economy, but in terms of real actions in the last couple of years, he has been a poor farmer- focussed and politics-focussed rather than the economy.

    So, implementing policies that will get the growth rate to a higher level is imperative. From a policy prescription standpoint, the areas of concern are relatively clear. Resolving bank balance sheets, recapitalising the banks and dealing with the NBFC sector is top of the list because without that, capital expenditures fall off in a meaningful way and if capital expenditures fall off, then the growth rate two years, three years down the road is going to be meaningfully lower. A more enhanced and focussed approach to land acquisition reforms in that sector will go a long way with respect to increasing infrastructure spending.

    From a resource mobilisation standpoint, he has to ensure that fiscal deficit remains relatively low and for that if he has to hive off some of the PSUs units to mobilise those resources that is something that he will have to do. He has lots of initiatives that are going to require a lot of spending and for the rural economy, those are important but finding goods ways of funding that rather than through deficit financing is going to be important.

    Over the last five years of Modi government, if you were to rate Modi government’s performance on reforms and policies on a scale of zero to 10, zero being the lowest and 10 being the highest where would you rate them?
    I would give them a four and the current mandate gives them an opportunity to take it to 10. The reason it is four is that GST, for example, is an extraordinarily good policy but the way they implemented it and rushed into it, made things far worse. They could have done slightly better. On the other hand, demonetisation was an utter catastrophe; it did not help in any way. All it did was disrupt the midterm growth prospects in a meaningful way.

    Recently, a lot of economists have been questioning the data that is coming out from the government in terms of mainly the GDP data. What is your take on this? Do you take the data with a pinch of salt or do you take it as it is, what are your thoughts?
    Well, we do not really focus that much on country level data because as emerging market investors we fully recognise and take into consideration the fact that the data sets probably are not of the same quality. That is not just the case in India. That is probably true of any significant emerging markets, the quality of the data is not going to be the same as it is in the US for example or things like that. That is really not the key issue. The key issue is really the underlying trends that you see in that. While we can question the quality of the data, it is quite clear that the Indian economy is doing okay.

    It could do a lot well, it was doing much better earlier and it has certainly slowed down. We are far more focused on not the specific number per se but the trends to that number and we take any data that we see out of any emerging market with a big grain of salt.

    Amongst emerging markets, where would you rank India currently?
    From an economic standpoint, we will rank India probably at the top of the list because every other emerging market is (growing) probably at a much slower rate. From an investment opportunity mindset for the next six to 12 months, it is probably middle of the pack rather than the top of the pack primarily driven by valuations than anything else.

    If the growth rate accelerates then those valuations become somewhat irrelevant and I think for us to participate in the Indian market in a meaningful way, that has to happen.

    You mentioned that Indian consumption stocks are trading at very rich valuations but then India consumption story is for real. There is a huge potential. Do you play this consumption story by other proxy stocks such as maybe Chinese phone makers or something of that sort?

    Again, we play the consumption stories-- they are a lot of companies closer at home that you can use to play that proxy rather than going all the way to China and phones, primarily because there are meaningful other drivers of those companies and growth rates rather than just what is happening in India. For example, we can play the consumption story reasonably well by investing in good banks in India. There are related companies in India that you can buy that are not where the valuations are not as rich where the crowding in of foreign investors is probably not as acute. We want to focus on those types of companies.

    We have the RBI policy coming up tomorrow. Where do you think the interest trajectory is going in India and do you think we could see a rate cut soon?
    The interest rate trajectory on a global basis is lower rather than higher and all you have to do is look at US 10-year rates to come to that conclusion and the drivers of that are very straightforward things. Global economy is slowing from its growth spurts especially driven by the US in 2018. 2019 growth rate is lower, core inflation will probably be lower as a result. Indian real rates and Indian nominal rates are meaningfully higher than where they need to be so there is certainly room to cut rates in a global context. So, I think our expectation is the outlook for bonds in India is quite good based on that thesis.

    In light of this easy monetary policy, the obvious question is what is the outlook for emerging markets over the next one year?
    The outlook for emerging markets over one year is actually quite good because we think growth is going to stabilise and it would not fall off a cliff the way at least the US bond markets are expecting. The real question with respect to emerging markets still remains -- what happens on the trade front and that is an open question. We think there will be a resolution or at least there would not be any further escalation, as long as that is the case emerging markets remain okay and you can see that in the dollar. As long as the dollar is not appreciating meaningfully, the outlook for emerging markets is reasonably good.

    If you were to name a theme for investing what could be the theme for investing under Modi 2.0?
    Economic reforms. At the end of the day, for Mr Modi to create a long-tenured reign of BJP. he has to address the economic issues head on. In the first term he tried to get there but after demonetisation, got focussed on all sorts of other things to make sure that he could get re-elected again. Now that he is there, economic reform is what he needs to focus on.

    Corporate earnings have not recovered since a long time. Recovery has been in the offing for at least 7-8 years now and it is nowhere in sight. Do you think we could see a concrete earnings recovery in FY20 or is that too early to expect as well?
    That is too early to expect. Again, the overall trend growth rate everywhere is slowing down. So, the earnings growth challenge is going to be with us for quite some time, but the markets are long-term discount vehicles. Much like the US, where earnings growth trend has slowed down as well. But because you have underlying policy support and rates are lower, valuations can go higher. If the markets are going to go higher, they are going to go higher on the back of hope for economic reform and policy rates coming down rather than earnings recovering in a meaningful way.

    What is the biggest threat to the Indian markets going ahead?
    The biggest threat to the Indian market is in a global context escalation of trade wars and oil politics. Clearly, as an importer of large amounts of oil, if the Iran issue gets far more acute and we deal with real geopolitical issues, that remains an issue. If trade war escalates, clearly that puts lots of sectors in the Indian economy in jeopardy. But, from a domestic standpoint, it is simple; if Modi does not do anything with respect to creating an environment to support investments, it will be another fettered opportunity -- which means land reform, which means banking reform, which means resource mobilisation, which means creating a conducive environment for companies that have been pulling back to get back to investing again.

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    6 Comments on this Story

    Amalesh Bhattacharya471 days ago
    LTCG,GST on financial transaction, E way bill on transport to small cities,costly trucks,uncooperative railways,compliance cost to businessman, corruption,harassment by tax officers,costly funds with no frills al these need attention by new govt
    Ramaguru Prasad Jakkala471 days ago
    OK, Tell him what to do, because PM himself doesn''t know what to do.
    Mukund Satwalekar471 days ago
    Another expert in line of Raghuram Rajan, Sam Pitroda. and Ruchir Sharma.
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