FIIs not gung-ho on prospects of India equity in Samvat 2076
FIIs have applauded India’s efforts to act decisively, but say they may not just be enough.
“The outlook for Indian stocks remains murky at best,” said Krishna Memani, Vice-Chairman for Investments at Invesco.
He said at a fundamental level, the deceleration in growth in India is very concerning. “While the corporate tax cut to revive investment is an important forward-looking measure, it alone cannot arrest the impending slowdown,” he said in an email from New York.
India’s economic growth slumped to a six-year low of 5 per cent in the April-June quarter and the Reserve Bank of India (RBI) projects it to fall even further to 5.3 per cent in the July-September quarter.
Multilateral agencies, including the International Monetary Fund (IMF), have also cut India’s growth forecast for this financial year and next.
IMF cut its growth estimate for this financial year to 6.1 per cent, calling on the country to use monetary policy and broad-based structural reforms to address cyclical weakness and strengthen confidence.
Memani says in addition to the residual negative impact of demonetisation and a hastily-implemented GST, the biggest near-term risk to the Indian economy and the Indian capital market is liquidity crunch.
He said the Indian Finance Ministry and RBI have to take significant, concrete and targeted policy actions to reduce the friction in the market, or on India’s economic outlook will remain murky.
“ Away from modest steps like consolidation of some PSU banks, there has not been any new policy initiatives. The external environment of low global growth has meaningfully reduced global trade and widening fiscal deficit makes the task more challenging. This problem will not solve itself and without policy measures the downward spiral will continue,” he said.
FIIs have invested a net of $ 10 billion in the market so far in Samvat 2075, after pulling put $2.5 billion in Samvat 2074.
Hertta Alava, senior strategist at Nordea, said she doesn’t have strong preference for emerging markets at the moment and the outlook for 2020 is still very unclear and dependent on many political issues.
“I have a neutral view on India. I think the government has lately implemented many market-friendly steps, which should support the market at the current level. However, they might not be enough triggers for stocks to rally,” she said. She sees 5 per cent upside for Indian equity indices from their current levels.
Alava said she would like to see more progress on the “Make in India” front. “India has a good chance to increase its presence in global manufacturing when China is not that attractive anymore. If successful, that could be a game changer for the Indian economy in the medium to long term,” she said.
FIIs have applauded India’s efforts to act decisively, but say they may not just be enough. “The silver lining in all of this is that when there is enough of internal impetus, the government can and has acted decisively; the corporate tax cut is a good example,” Memani said.
He said more policy actions are needed on the liquidity front to avoid a more acute slowdown. He said RBI has to play a larger role than it has so far.
“From a central banking perspective, the policy prescriptions are relatively straightforward, but require significant political support from the central government,” he said. “The key point in this context is that the time to act is now before it is too late,” Memani said.
Darshan Bhatt, Co-founder & Deputy CIO, US-based Glovista Investments, however, believes the Indian equity market should perform well over the next year, both in absolute as well as relative basis, primarily on account of earnings growth as well as currency translation effect.
“Indian market is currently one of the most attractive among emerging markets,” Bhatt said in an email from the US.
“Positive earnings dynamics stemming from the recently announced corporate tax cuts should meaningfully boost earnings and cash flow for Indian companies,” he said.
Bhatt said the banking sector should benefit not only directly via reduction in tax rates but also indirectly as improving cash flow for borrowers should help improve the non-performing loans dynamic.
In addition, the rupee is now attractive for international investors owing to cheaper valuation, attractive carry as well as benefit of owning a currency with low correlation to global trade dynamics in an environment of rising US-China trade frictions, Bhatt said.