We are using the coronavirus
scare to add positions. The virus will rise, peak, and fall. Along this path, weak hands will panic, sell unnecessarily, and drive down prices of assets below their fair value, before scrambling to buy them back when it turns out the virus is containable. Professional investors do exactly the opposite.
How are you viewing India now?
India has entered a phase with higher fiscal deficit
and rising inflation, which forced the Reserve Bank of India (RBI) to keep rates higher-than-anticipated. The greater financing needs are leading to greater borrowing, but the government is yet to develop the courage to open India’s bond markets to foreign involvement, free of quotas. The pattern of loose fiscal policy leading to higher rates is bad for private investment and business confidence.
Do other markets look more favourable?
After the election-related fiscal blowout, India needs to scale back fiscal spending and roll out aggressive reforms. But the Narendra Modi administration seems to have run out of ideas. It is stopping short of fixing public banks and open completely to foreign investors. India is beginning to look like a tired proposition. There are better opportunities in other countries, where valuations are relatively attractive and the outlook is supported by a strong commitment to structural change, including China and parts of South America.
Will markets react sharply in case the fiscal situation worsens?
The Budget assumptions as regards revenues are somewhat heroic. The government is doing more handouts and relying more on one-off fiscal measures. This represents an erosion in the quality of the Budget. While the medium-term projections show a return to smaller deficits, there is considerable uncertainty about achieving the targets. The markets will not welcome fiscal deterioration. Fiscal largesse was the reason for the decline of the previous Congress-led administration, and Modi now seems to be heading down the same road.
Have the markets run ahead of fundamentals?
Yes, they have. I would stick to a very macroeconomic-focused equity investment strategy and carefully identify which sectors benefit from the current fiscal and monetary policy stances. Then identify very large, liquid and cheap companies within those sectors, and leave everything else. Have a high conviction portfolio with few stocks that meet these requirements. Be ready to trade out of them as soon as they are no longer cheap. There is not a lot that fits the bill. That is part of the problem.
Will markets correct if FY21 corporate earnings disappoint?
I am not comfortable with earnings and have stronger convictions elsewhere. The Asian semiconductor play looks very attractive compared to domestic Indian equities, for example. Granted coronavirus has led to some temporary setbacks, but they should be viewed as useful entry points. Coronavirus is just a version of flu and it will subside. Investors should ruthlessly exploit any coronavirus-related panic to add to positions in Asian equities.
Have the recent policy proposals fixed issues relating to the financial sector?
No, they have not fixed the problems. Public sector banks are slush funds for special interest groups. They are ultimately a quasi-fiscal burden and they suck the lifeblood out of the economy. They should be shut. To the extent that it meets certain social needs and address market failures, a single central development bank should be used to end the practice of having de-facto slush fund banks. Without closing them completely, the problem will recur.
How will stocks of listed public sector units do over next 12 months given the disinvestment agenda?
This is a positive development. India has a long way to go to reduce the size of the state and transferring activities from public to private control. However, it is not sensible to base fiscal policy on divestment. Divestment gives one-off revenues, which, by definition, cannot finance an ongoing fiscal deficit.
The government should base fiscal targets on recurring revenues and divestment revenues should be funnelled into a sovereign wealth fund rather than be squandered to finance recurrent spending.