India best equity story in EMs, says Chris Wood

New Delhi: “India is the most preferred equity story in the emerging markets universe on a 10year view,” says Christopher Wood, managing director and equity strategist at CLSA in his weekly note, GREED & fear.
“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,” he explains. That move has triggered an investment rejig in his portfolio, with the addition of State Bank of India with a three per cent weight; a further one percentage point will be added to the existing investment in HDFC. As a result, the investment in Naver in the Asia ex-Japan long-only portfolio will be removed.
The positive stance on India is despite the market’s rich valuations, up nearly 19 per cent since the December 2016 low.
“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,” says Wood.
In the first three months of calendar year 2017, mutual funds have invested ~11,469 crore in the Indian equity market. The flow continued in April, with MFs putting ~9,917 crore, compared to ~4,196 crore in March. In the seven months between October 2016 and April 2017, they have invested ~53,469 crore in equities, compared to ~16,527 crore in the previous corresponding period, the data shows. New bank regulations Last week, the government had notified an ordinance to amend the Banking Regulation Act. This brings a new framework to deal with the ~6 lakh crore worth of non-performing assets (NPA) in the banking system.
The 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 stressed assets.
“The other aim of this amendment is to remove a concern shared by all bankers, that if they agree to a haircut (write-off) on a specific loan, they will be at risk of future investigation by the judiciary or an investigative agency. It is the reluctance of banks to take haircuts which has been the key cause of India’s long festering banking problem,” says Wood.
The lack of progress in addressing this legacy problem, he feels, 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 public sector banks to raise capital. A process which should also lead, with the encouragement of both RBI and the government, to the consolidation of these banks, Wood feels. GST Implementation of the goods and services tax (GST) laws, according to Wood, is a landmark achievement that will help end inter-state barriers to trade and 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,” he says.