Policy measures by govt needed to attract foreign investment: Harshad Patwardhan
Events at the global and domestic levels have kept the markets guessing. Harshad Patwardhan, executive director and head of equities, JP Morgan Asset Management (India), tells Puneet Wadhwa that though RBI’s measures on Monday were broadly in line with expectations, implementation of policies is key. Edited excerpts:
June was full of key economic and political events, both at the domestic and global levels. What is your interpretation of the outcome? Has it made you change your view on how the equity markets, including ours, may pan out over the next few quarters?
For the last several months, economic and political events, both within and outside India, have been weighing on the markets. While on an overall basis the news flow has been more negative than positive, bouts of optimism and hope, followed by those of disappointment and fear, have increased the market volatility. As this negativity has been around for a long time, businesses, consumers and also investors have been taking steps to adjust to the new reality.
In the domestic context, slowing growth, persistently high inflation and prolonged policy inaction have been the key negatives, while softening oil prices is the key positive. While it is impossible to give a prognosis of how exactly things might transpire over the next few quarters, we believe the key factor to keep in mind is that a lot of the negatives seem well digested by the market.
It is reflected in valuations of the broader market (and, more importantly, valuations of individual stocks) and it appears that at the margin, incremental negative news is not always causing stock prices to fall.
What is the road ahead now, according to you, for the world economy? Do the statements from central banks instill some confidence on how things may shape up, or is it gloom-and-doom ahead?
Central banks have generally been doing their bit to improve the situation with the tools available at their disposal. However, for things to improve in a sustainable fashion, governments need to deliver, too, however unpopular the measures might be in the short term.
The Reserve Bank of India (RBI) has unveiled a few measures to stem the rupee’s fall and boost sentiment. Is this what you had expected? What more would you have liked to see?
Over the last few months, RBI had taken several measures to help moderate the slide in the value of the rupee. In this backdrop, the steps announced by the central bank regarding an increase in ceilings in government debt for foreign investors and ECB (external commercial borrowing) for the manufacturing and infrastructure sector were broadly in line with expectations.
We believe the heavy lifting on this issue will now have to be done by the government in terms of implementing policy measures to attract foreign investment and improve fiscal discipline.
Revision in the credit rating outlook has become a common feature. In the Indian context, how do you read the diverse set of statements from these agencies?
For equity investors, what rating agencies say and do have limited importance. Generally, stock prices tend to reflect the changing circumstances much quicker. Many of the concerns expressed in the announcements by the rating agencies are valid. They are, to a great extent, already reflected in market prices. However, rating agencies’ actions have implications for fixed income investors and this, in turn, could impact equity markets at times.
How much importance will the market participants or foreign institutional investors give to the political churn, given the upcoming presidential elections? Do you think there could actually be some headway in breaking the policy logjam that would enable key reforms being implemented?
Presidential elections in India are not as important as, say, parliamentary, or key assembly elections. However, given the backdrop of current circumstances, the presidential election could throw up clues about the potential alignment of political forces before the scheduled general elections in 2014.
How are you approaching India as an investment destination now, compared to the emerging market peers and other BRIC (Brazil, Russia, India and China) countries? How do we compare on valuations and does the corporate earnings’ outlook justify this arithmetic, given the macro-economic headwinds?
As mentioned before, a lot of the negatives (both domestic as well as linked to external factors) have been around for a long time now and are more or less reflected in earnings estimates and low valuations.
For Sensex companies, the one-year forward price-to-earnings ratio is at a little over 13x, close to one standard deviation below the long-term trading average. So, the Indian market, having digested the strong head-wind of negative news flow, looks reasonably placed in its peer group.
Which sectors / themes are you now betting on in the Indian context, say, for the next 12 - 18 months? What key factors will force you to recalibrate your strategy?
There are several stocks — large and small — that are trading at very attractive valuations, having been battered by negative developments and expectations. So, at the moment, our equity portfolios have a mix of businesses, which offer more relative certainty in future earnings. This includes consumers and pharmaceuticals and certain stocks in the financial sector. Depending on how the situation develops in terms of policy decisions and interest rate cycle, we will change the mix to suit the circumstances.