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India is now a low-beta market
Ridham Desai, MD – Research, Morgan Stanley
Aug 05, 2016 | Source: Business Standard
On GST: This is one of the biggest and much-awaited reforms since 1991. From a short-term market perspective, it is probably priced in. However, its long-term implications will take some time to be discounted. The new law, when it is enacted, will eventually reduce the cost of doing business in India, improve the ease of doing business, improve government revenues by reducing leakages and likely increase growth.
Current the earnings season: Our database shows that only a third of the companies have reported earnings. Of these, there has been an improvement in the surprise breadth, one out of two companies has surprised positively. Another continuing trend from the previous quarter is that domestic businesses are doing better than global ones. We see strength in three sectors - retail banks (lenders to consumers/businesses), discretionary consumption (small household equipment from air coolers to kitchen appliances to automobiles) and select industrials, which are beneficiaries of government spending on infrastructure.
On government's attempt to stimulate consumption through higher revenue spending: The government has attempted to stimulate growth through infrastructure spending, rather than consumption spending. The Pay Commission award was not a choice they made. If you go back to the Budget, the government's rural expenditure stands unchanged as a %age of gross domestic product (GDP). The only item gaining share in government expenditure is infrastructure. This is visible in roads. Last year, the government finished 6,000 km and issued orders of 10,000 km. This year, the target is to issue orders of 25,000 km and finish 15,000 km. These are aggressive targets and even if they achieve 80 per cent, it will be a mega jump over the trailing 10-year averages. The step up in infra spending is a large.
On challenge to India's growth: The biggest challenge is global growth, as we are not in an era of five per cent global growth. Between 2004 and 2008, world GDP growth averaged 5 % and today we are around 3 %. It is not conducive for India's growth. There has been a turnaround in our external financing. India has been heavily dependent on global capital flows to fund its external account. The ratio was typically 3:1 - for every $3 of portfolio funds, we got $1 of foreign direct investment (FDI). So, whenever there was a problem in global capital markets, India did poorly as flows got threatened. Today, ratios have changed. For every $4 of FDI we are getting $1 of foreign portfolio investments, which lends stability. India is now less vulnerable to global capital market cycles and this has not been the case for 20 years. India is now a low-beta market.
On recent run up in equities : Markets are up 20 per cent since February, but if you compare it with last August, they are down one per cent. We are looking rich compared to emerging markets (EMs). In 2007, India traded at 2.2 times the EM book multiple. India's own book multiple was 6.5 times and the rest of EMs was at three times. Today, India is trading at 2.2 times EM book multiple but India's own book multiple is 3x, which is half of what it was in December 2007. Other emerging markets have their own structural issues, which is why their book multiple has collapsed. We are a defensive play now. The perception of the world is that we have a superior growth outlook and it is widely accepted. We have been on a strong wicket since 2013.
Can corporate India revert to double digit earnings growth? Double digit growth is quite possible. I think we can look at a combined annual compound annual growth rate of 15-17 % earnings growth over three years. I am optimistic about the next 12-24 months.
Related Keyword
Fixed Income
Stock Market
Fed Reserve
India
GST bill
Indian Markets
Banks
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