Mumbai: At a time when the Indian economy remains weak, a fiscal catalyst in the budget would be welcome, says Adrian Mowat, chief emerging market and Asian equity strategist, JPMorgan Chase and Co. In an email interview, Mowat says that subsidy savings should be redirected for productive uses such as infrastructure. According to Mowat, the overall trend for the Indian equity markets remains bullish and that JPMorgan continues to be overweight on India. Edited excerpts:

What is your wish list for Indian budget?

A fiscal catalyst. PMIs (purchasing manager’s index) and consumer confidence are rising but activity is still weak. This is not the time to focus on deficit reduction. Subsidy savings could also be redirected to productive use such as infrastructure and social priorities (education and health). This would strengthen direct demand plus consumer confidence.

JPMorgan’s economists estimate that a reduction in energy subsidies and an increase in excise tax would generate a saving of 0.7%/GDP (gross domestic product). Add to this other subsidy reforms and the government’s fiscal flexibility could be above 1%/GDP. The government could also potentially amplify this with asset sales to provide a large fiscal stimulus while maintaining confidence in fiscal sustainability. We hope for a confident and bold budget.

What specific sectors would you like to see a focus on?

A focus on public infrastructure and manufacturing. This will require a significant increase in capital expenditure, plus incentives to boost infrastructure and manufacturing by the private sector and PSUs (public sector units). This would be positive for financials, building materials and infrastructure. It should also boost potential output, helping all sectors.

A plan to transform all product subsidies into electronic cash transfers over the next 2-3 years. This would reduce policy risk for energy distributors.

Another positive move would be significant decentralization of tax revenues and expenditure control to the states.

And finally, the budget speech may institutionalize the monetary policy framework, which would be good for all industries in that it could lead to more stable inflation and interest rates.

Do you think the finance minister will meet the high expectations of the market?

It is always difficult to judge as expectations can change in the weeks ahead of the budget, but I think it is fair to say that investors will be disappointed by a modest fiscal stimulus. Economic growth with environmental degradation is not a success. Air quality in major cities is damaging health, so incentives for environmentally sustainable development will be welcome.

Where do you see the government setting its fiscal deficit target and what could be its GDP projection?

The first question is what is the denominator? GDP revisions that document a larger economy help with this ratio. The market range is 3.6-3.9%/GDP. I am not worried if it is at the higher end of the range if the spending is productive. The sharp reduction in the current account deficit, more sustainable fiscal policy and lower inflation have decreased the risk to India’s credit.

Indian markets have been a bit edgy after hitting record high levels. What is your near and medium term outlook for Indian equities? What are the reasons for India being favoured over other emerging markets?

Edgy? There is nothing unusual in the pattern of the market and the overall trend is still bullish. As always, we try to avoid predicting the near term—one is unlikely to add much value. If economic growth accelerates, the medium-term outlook is attractive. Low inflation and faster growth should support a re-rating. Lower input prices and financing costs are good for margins. Faster top line growth should result in operating leverage. A return in excess of 15% is quite possible, in our view.

India has the potential for a re-rating (lower discount rates with faster growth) and rapid earnings growth. This is rare in today’s world.

What is your take on the earnings in the last quarter? What are your expectations for FY15 and FY16?

Growth was weak in 4Q14. The economy is yet to see the benefits of lower oil prices. Furthermore, RBI only started to cut rates in 1Q15. Investors should not react to these earning numbers, what matters is that earnings improve throughout 2015. The EPS (earnings per share) growth forecast for CY15 and CY16 are 16% and 18%, respectively.

Are Indian stocks hitting the expensive zone, considering earnings growth is not yet robust?

Indian economic growth has been sub-par for four years. We believe this means earnings are at a cyclical low. Today’s PB (price to book) is low and PE (price to earnings) is lower than during previous periods of low inflation and high growth. If economic growth in India does accelerate then today’s PE is not a barrier to high returns.

Only healthcare and consumer staples are expensive relative to history. This is normal after a period of sub-par economic growth. I am buying India for growth not value.

What is your outlook on interest rates? How much of rate cuts do you expect in 2015 and when?

JPMorgan’s economists forecast the repo rate to decline to 7.5% in 1Q15. Further cuts are possible if the disinflation trend continues. We are also bullish that long rates can decline.

How do you rank Indian market vs other emerging markets at this point?

Simply, we are overweight India. We do not rank within our overweight markets. We are also overweight Indonesia, the Philippines, Thailand, Turkey and South Africa. India offers the prospect of accelerating earnings growth and further re-rating. The re-rating drivers are high GDP growth with low inflation combined with a lower discount rate. The risks are that the Indian consumer proves cautious, higher oil prices and delays in implementing legislation.

Subscribe to Mint Newsletters * Enter a valid email * Thank you for subscribing to our newsletter.

Share Via