Tryst with Destiny…

By: Navneet Munot, CFA, CIO SBIMF and Director IAIP

This is the “tryst with destiny” for our generation. Young inhabitants of this old civilization have voted for a decisive change. In a journey from a ‘tea stall boy’ to India’s prime minister through sheer passion and perseverance, Mr. Narendra Modi has caught the imagination of people which is unparalleled in recent history.

The world has just seen the glimpse of the biggest show on planet earth with 800 million people voting so peacefully. With a man determined to change the destiny of its people at the helm, everyone will see an economic miracle unfolding in years to come. In a world struggling with structural issues, anemic growth and lack of leadership, India is likely to emerge as an ‘oasis of hope’.

This is a vote for growth and governance. A country with vast natural and human resources starting with such low base can correct the self-inflicted pain of low growth-high inflation with right policy mix and better governance.

The main agenda of the new government would be to get higher economic growth with focus on creation of jobs and containing inflation. Having witnessed the dark side of external vulnerability, policies will gear towards boosting exports/import substitution. For these three critical goals to be achieved, better governance, fiscal discipline and execution ability would be the keys. Building physical and social infrastructure is essential for increasing productivity of the economy which will go a long way in job creation, containing inflation and make India globally competitive. While legislative reforms may take time, the new government will focus on clearing the execution logjam and creating a ”feel good environment” which can revive the investments. There are several low hanging fruits like resolving the Coal and iron ore mining issues which can have positive consequences. After 30-years, we are seeing a single party gaining majority in the parliament. The next PM has a strong belief in the federal structure and can push through the growth agenda to a different scale by working cordially with state governments. People have clearly rejected the “dole out” policies of UPA regime. Fiscal consolidation will have to be achieved with larger focus on cutting the wasteful expenditure particularly subsidies, broad-basing the tax revenues net and moving from a mind-set of ‘outlays’ to ‘outcome’. Both fiscal and monetary policy should be in sync to ensure inflationary expectations are well-anchored while investment climate is supported. Both these goals are inter-twined and not mutually exclusive as the debate goes.

The way bold policies of Mr. Ronald Reagan as President and Mr. Paul Volcker as Fed Chairman changed the course of US from a country dealing with severe stagflation in late 1970s to a long period of sustained non-inflationary growth and a golden period for investors, something similar can be expected from the duo of Mr. Narendra Modi and Mr. Raghuram Rajan. The parallels are striking.

The global investors have maintained their faith in India story with allocations of over $ 90 billion into equities over the past 5 years. In a world awash with liquidity and so short of investment avenues, India will continue to attract large flows given the relative opportunity and valuation. Spain and Italy whose solvency was questioned 2 years back are seeing their 10-year bonds trading at even less than 3%. However, domestic investors have remained skeptics while Sensex is touching new highs. Having missed the rally so far, the question in everybody’s mind is whether India can return to high growth path so soon and is all the good news already in the price?

Our belief is that macro fundamentals have already started bottoming out. There are near term challenges such as fiscal constraints, possibility of a poor monsoon impacting the growth and inflation outlook and stress in the bank’s balance sheet. However, a new government has the opportunity to unleash the growth potential by leveraging the structural strengths notwithstanding these near term challenges.

Corporate profit growth in absolute percentage terms and relative to nominal growth has been below the long term trend for last 5-year. Bulk of the profit growth has come from select sectors like consumers, IT and Pharma. Sectors dependent on domestic economy have lagged. This can change with recovery in domestic economy, mainly driven by revival in investment cycle. With relatively weaker rupee and restructuring done during the downturn, manufacturing sector is regaining competitiveness and can benefit from a sizeable opportunity in exports. Given the BJP’s manifesto and Mr. Modi’s track record, India can be expected to leap-frog in building physical and social infrastructure using innovative technology. He has mentioned that agriculture, manufacturing and services (tourism can see a quantum leap) are the three pillars of India’s growth structure and would be paid equal attention. These will create opportunities for a variety of businesses across sectors.

We expect a gradual increase in domestic savings that will be channelized into productive financial assets. The current rally has a potential to gain sustained momentum as the local investors start increasing equity allocations.

Valuations are reasonable as a large section of the market is still using a rear-view mirror rather than looking forward to the possibilities. We expect tremendous opportunities in stock picking with a long horizon as India finally embarks on its “tryst with destiny.”

Acche Din Aane Wale Hai (Good days are here again).

– N M