As the countdown to the final regular budget of the UPA Government on February 28 before next year’s general elections begins, many questions as to what lies ahead continues to haunt market players and investors alike. The past year saw record FII inflows exceeding $20 billion that propelled the market even as domestic investors shunned it. In an interview to Business Line , Dinesh Thakkar, CMD, Angel Broking, Mumbai, shares his thoughts on the forthcoming Budget and beyond. Excerpt.
How do you describe the mood of the market players now compared to 2012?
Investors are more confident going into 2013 than 2012. Last year presented an unstable Euro zone and our Government was in a state of inertia in matters of public policy and fiscal management, with no signs of monetary easing. But since September 2012, a slew of policy decisions on FDI in retail, insurance and pensions, diesel price, GAAR, were taken, which along with benign global liquidity had helped turn the tide.
How long will the market euphoria continue in the absence of real economic recovery?
There is no euphoria in the market. The market mood is normalising in the face of purposeful action by the Government. The Sensex one-year forward multiples are still at 14x on an earnings growth forecast of 12 per cent indicating that no one expects economic wonders in the next six months. Markets can afford to remain upbeat at these levels as the economy slowly recovers.
Will the Indian markets continue to draw record FII inflows?
FIIs have been scouting for investment destinations that offer more stability, certainty and growth than the developed markets. We can attract flows upwards of $30 billion. Our economy is twice the size of what it was in 2007. GDP growth has troughed at 5.3 per cent and as we move higher, the incentive to invest in India would only increase.
What does the market expect from the budget 2013?
Apart from the high fiscal deficit, the economy is also running an uncomfortable current account deficit. Any rating downgrade might lead to flight of foreign capital. The priorities of the Government will be to lower fiscal deficit, bring down inflation and interest rates to revive investment environment and boost GDP growth.
In addition to removing supply-side bottle-necks in the economy, there may be greater clarity on the implementation of the GST and DTC and the direct cash transfer programme. On food security, the legislation is likely if not in this budget closer to the 2014 general election.
The market is on a song for nearly a year, though economic recovery is not in sight. Is the market wrong this time?
The market has bounced back from depressed levels to a more normal zone. In 2013, GDP growth will be higher, interest rates will be lower and so will be the deficits. The area of disappointment may be in the pace of the reform measures being initiated. As long as the market is convinced of the direction, it will remain stable and react depending on the steps taken.
What is the minimum that needs to be done by the Union Government, RBI, and market regulator to revive investor interest?
There are no quick fixes to revive investor interest. Investor interests will revive if equity starts outperforming other asset classes or at least delivers positive inflation adjusted absolute returns. While SEBI and RBI are doing a good job, the Government is acting with a sense of urgency. As the results of the Government’s actions bear fruit, retail investors will flock to the market.
How will the market revive if companies take the IPP route to meet public shareholding norm as it shuts retail participation?
Institutional Placement Programme (IPP) route is preferred by the companies as it is less time consuming and more efficient. If the retail investor sentiment is weak, there is little that the companies can do especially as they are operating on a June deadline. Moreover, offering equity at throwaway valuations to attract retail investors will be unfair to the existing investors.
How long will the market remain a prisoner to rate related decisions by the RBI?
Monetary policy is an important cog in the wheel but is not the sole determinant of market direction. In the boom periods of 2003-08, monetary policy was being progressively tightened but the economy and the market still did well. In times of fiscal stress, monetary policy is being emphasised as it offers a faster short term fix.
But a durable long term fix can only be offered by mending our fiscal health. So the market will give an impression of being a prisoner to rates but in reality, it responds more to fiscal actions.