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Bank reforms make India best equity story in emerging markets: Chris Wood

Puneet Wadhwa / New Delhi 13 May 17 | 02:57 AM

CLSA's Christopher Wood

India is the most preferred equity story in the emerging market universe on a ten-year view – a belief that has been strengthened by evidence that the Modi government is showing a renewed focus to address the asset quality problem in the banking sector, says Christopher Wood, managing director and equity strategist at CLSA in his weekly note, GREED & fear.

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The positive stance is despite the rich valuations of the Indian markets that trade at around 18x FY18 earnings and have rallied nearly 19% since December 2016 lows.

“GREED & fear remains constructive even if the Indian stock market is certainly expensive on a forward earnings basis. The continuing rise in the stock market year to date, and the resulting re-rating, has been triggered primarily by ongoing strong inflows into domestic equity mutual funds," Wood says.

In the first three months of calendar year 2017 (CY17), mutual funds have invested Rs 11,469 crore in the Indian equity market, data show. The flow continued in April as well, with the MFs putting in Rs 9,917 crore compared to Rs 4,196 crore in the previous month.

In past seven months, between October 2016 and April 2017, they have invested Rs 53,469 crore in equities, compared to Rs 16,527 crore in the previous corresponding period, data show.

New bank regulations

Meanwhile, the government had notified the Banking Regulation (Amendment) Ordinance 2017 last week, kick-starting a new framework to deal with Rs 6-lakh crore worth of non-performing assets in the Indian banking system.

The banking regulator has also been empowered to decide on dealing with toxic assets and instructing banks to act accordingly. The Reserve Bank of India (RBI) will also set up multiple oversight committees to direct banks and joint-lending forums to deal with the stressed assets.

“The other aim of this amendment is to remove a concern shared by all bankers that, if they agree to a haircut on a specific loan, they will be at risk of future investigation by the judiciary or an investigative agency. It is the reluctance of the banks to take haircuts which has been the key cause of India’s long festering banking problem," Wood says.

The lack of progress addressing this legacy problem in the banking sector, according to CLSA's Wood, is the main reason why India is still seeing no evidence of a renewed private sector-driven investment cycle. 

Once the NPA issue is resolved, the way will be clear for the public sector banks to raise capital, a process which should also lead, with the encouragement of both the RBI and the government, to the consolidation of the public sector banks, Wood feels.

GST implementation

Implementation of the goods and services tax (GST) bill, according to Wood, is a landmark achievement that will help end inter-state barriers to trade and help increase tax revenues.

“The rest of the Indian story under the extraordinary Modi remains as vibrant as ever. While it is true that the Aadhaar programme was launched under the previous government, the real roll out and practical application of the programme has been massively leveraged since Modi assumed power. The benefits of direct electronic payments are hard to exaggerate in terms of reduced leakages and the like," Wood says.

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