IAIP – Investing in India – Positioning for a new Dawn

Investing in India – Positioning for a new Dawn

July 5^th 2012

Celebrating on the occasion of winning two Society Excellence Awards viz. Best Member Communication and Best Volunteer Management Programs, IAIP also organized presentation by Navneet Munot, CFA, CIO SBI Mutual Funds and Director, IAIP & Chair Advocacy Committee at IAIP. The session was well attended. This event is qualified for 1.0 CE credit hours.

In his presentation titled ” Investing in India: Positioning for a new Dawn” Navneet sent the message that most of the negatives are already built into the equity market and that its time to shift focus on the underlying strengths of India viz. demographics, decent GDP growth, and under-investment in equities by the Indian households all of which will result into healthy returns for the investors in the long run. The bullish factors which were present during 2007 viz. vibrant democracy, vigilant regulator, enterprising corporations, young aspiring consumers, evolving partners in global value chain, multi-year infrastructure investment still remain the same. It is just that government needs to come out with favorable business policies to re-ignite the animal spirit.

Navneet also raised interesting questions and attempted to answer the same. One of them being “Does coalition government affect reforms?” According to Navneet reforms in India come only when it hits crisis. Assuming that India has hit the worst in terms of twin deficits viz. fiscal and current account, high & stubborn inflation and slowing GDP growth, it is time to expect some action. UID aimed to provide subsidies directly to the target group, Right to Education Act, Right to Information Act are steps in right direction. Going by the recent election results Voters are looking for growth and good governance.

Second was “What drives the Indian market?” Though the Indian economy is de-coupled from the rest of the world due to strong domestic markets, the capital markets are not yet. Indian equity markets are highly dependent on foreign portfolio investments. FIIs constitute around 18% of total ownership in the listed Indian corporations. Hence its linkages to global risk-on/off trades. This could be further corroborated by higher correlation between Sensex and Crude Oil & CRB index; making it more of a beta play.

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Some of the key takeaways are:

On the negative side

• Global economies would witness lower growth for a long time.
• Leverage was shifting from private companies to sovereign balance sheets
• Markets across the globe have seen higher volatility, correlations and risk premiums.
• Economic and market cycles have shortened. Even in case of Indian bond markets the yields (10 year G-Sec) decreased from slightly above 9%  before the global financial crisis hit the market to slightly below 6% in early 2009 to 8% currently.
• Between 2007-12, Government resorted to spending excessively to create demand (NREGA, Bharat Nirman, farm loan waiver, higher subsidies) without creating adequate supply leading to higher inflation and higher fiscal deficits.
• Government could have  spend the money wisely in physical infrastructure like ports, roads, airports etc which would resulted in both creating employment for the poorer sections as well as creating assets which could sustain growth in the long term.
• Incremental capex by the private sector was at an all time low

On the Positive Side:

• Public debt levels in India as a percent of GDP, which is much better than those in the west, is reducing steadily since 2004 due to higher GDP growth rates.
• The current account deficit was not the sole reason for the Rupee’s depreciation. The Brazilian Real has also equally depreciated during the same time period. If one excludes net import of gold and jewelry, then India’s current account deficit is at just 1.4% of the GDP. The currency depreciation makes imports of capital goods especially from China expensive thereby increasing cost competitiveness of the local manufacturers. And it also makes exports more attractive and competitive.
• The commodity super cycle was nearing its end and this would be beneficial for India.
• Munot argued that household savings, a major portion of which is currently invested into physical assets like Gold and real estate would eventually come back to financial assets. Indians on an aggregate basis have very little exposure to equities – around 2.8% of their assets.
• The market would continue to remain stock pickers paradise. Most of the negatives for Indian equities coming from government policy paralysis, scams, GAAR rules etc are already built in. From here on things could only improve.
• Key themes that he liked included Healthcare and Asset owner companies

About the Speaker:

Navneet Munot is Chief Investment officer of SBI Funds Management Private Limited. He is also the Director of SBI Funds (International) Private Ltd. As CIO, Navneet leads one of the largest investment team in India which manages assets of over Rs50,000cr across various asset classes.

Navneet has over 18-year’s experience in financial markets. Before joining SBI MF, he was executive director and Head of Multi Strategies Fund Boutique at Morgan Stanley Investment Management. Prior to joining Morgan Stanley Investment Management, he worked as the Chief Investment Officer (Fixed Income and Hybrid Funds) of Birla Sun Life Asset Management Company Ltd. Navneet had been associated with the financial services business of the Birla group for over 13 years and worked in various areas such as fixed income, equities, foreign exchange and derivatives.  Navneet has done post-graduation in Accountancy and Business Statistics and also a rank holder Chartered Accountant. He is a charter holder of Chartered Financial Analyst Institute, US and Chartered Alternative Analyst Institute, US. He has also done FRM and is charter holder of Global Association of Risk Professional (GARP). He is a Director of IAIP and chairs Advocacy Committee. Navneet is an avid reader. His articles on matters related to economy and financial markets have widely been published.

 Contribution by: Sitaraman Iyer and Chetan Shah, CFA both IAIP Volunteers

Photographs by: Santosh Samal