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Stocks The Economic Times Wealth, July 7-13, 2014

Do you share the optimism for a structural
bull market in India?
I believe a structural change will happen, es-
pecially considering the way the new govern-
ment has started off. The policy decisions so
far clearly show the intent, where long-term
benefits for the economy are more impor-
tant than short-term populism. The focus on
governance, taking hard decisions, getting
investments, are all steps in the right direc-
tion. That sends a very positive signal. But
we need to give them some time to effect a
turnaround. These changes will bring the
economy back to its growth trajectory within
three years. We are not going to get back to
the 8% growth trajectory immediately. As
long as the government is setting the right
economic agenda, we should be in a strong
position in five years from now.
Are there any visible signs of recovery?
Yes. We do see some green-shoots taking
shape. For instance, the recent automobile
sales numbers have been very strong and the
company managements are bullish. Com-
mercial vehicle fright rates are also begin-
ning to inch upwards. Demand for power is
going up steadily. The HSBC PMI for services
was the strongest since January 2013. These
are early signs that the economy may be bot-
toming out. What also works in favour of this
government is that they have inherited an
economy that is practically at the bottom.
So, from here on, things can only improve. If
the initial tough decisions are taken, the pace
of the recovery can increase significantly.
Given the sharp rally we have already seen,
is there a scope for further upside?
In the last five years, the market PE has
halved, but the earnings have almost dou-
bled. Now, even at current levels, we are
around 16 times earnings. Sure, a lot of po-
tential is being discounted. But, from here
onwards, you will only see corporate earn-
ings upgrades coming through. The pace of
upgrades will depend on how the govern-
ment actions pan out and how much the
economy picks up. If that pace is strong, the
market PE will continue to increase. So far,
we have seen the markets being driven large-
ly by foreign liquidity. Domestic liquidity is
not there yet. Financial savings rate is down
from 12% in FY10 to 7% last year. Clearly, peo-
ple have shifted to physical assets
than financial assets. Given that
gold is no longer attractive, that
latent demand will go back to fi-
nancial savings and liquidity
will eventually flow into the eq-
uity market. The market may
also have moved up significantly
of late, but when seen in the con-
text of the last five years, it hasnt
done much. We can expect a decent rally
from here. It will not be a one-way-up mar-
ket, there will be corrections along the way.
How vital are rate cuts for the recovery?
For rate cuts to happen we need to see cer-
tain improvements on the ground. Bringing
the fiscal deficit and inflation under control,
for instance. At the moment, inflation is fair-
ly under control. Even if the monsoon is not
upto the mark, a lot of measures can be tak-
en to control food inflation. The damage can
be mitigated. If inflationary expectations are
controlled, it will become a conducive envi-
ronment for rate cuts. It may not happen im-
mediately, especially now, with oil posing a
threat. But the RBI will also want to encour-
age growth which is not inflationary. They
will have to manage both.
Are you expecting a lot from the Budget?
We cannot have very high expectations from
the Budget because of what they have inher-
ited from the previous regime. We have to be
realistic. The first two months deficit num-
bers are nearly 50% of the target. Thats not a
very healthy Budget to inherit. It is going to
be a challenge for sure. It is the small things
which can still be addressed: widening of tax
base, laying down a fiscal consolidation
roadmap, focus on investment expenditure
rather than consumption expenditure, and
implementation of the GST and DTC, among
others. If they are able to give a realistic road-
map for fiscal consolidation and lay down
the economic agenda, it will be a good
enough beginning. You cannot expect all
concrete steps at this juncture. Everything
need not flow in this Budget, it can come in
later as long as they show the commitment to
address various problems.
Cyclicals have witnessed a big spurt in pric-
es, driven purely by sentiment. When do you
expect earnings to catch up?
When a cyclical upturn starts, one doesnt
look at valuations. This is the bottom of the
cycle, which has come after a five-year
downturn. Even if individual stocks have ris-
en 30-40% , this is after having fallen 70-80%
over the last few years. It is not that they are
overvalued now. Now, for it to go back to ear-
lier levels, you will need to see those funda-
mentals falling into place. You need demand
pick up and price increases as well as
deleveraging of balance sheets. We
have already seen infra compa-
nies raising equity through QIPs,
which has flagged off the delever-
aging process. Cyclical compa-
nies should follow suit. Globally,
we have seen some increase in
metals prices which should augur
well for Indian companies. Consider-
ing the approvals put through by the previ-
ous and new governments, it is only a matter
of time before investments get kick-started.
Arent defensive and export-oriented com-
panies attractive anymore?
In the defensive space, other than FMCG,
outlook for pharma and IT continues to look
good. In fact, we are still positive on pharma.
In IT business volumes are looking strong.
They are positioned very well, despite the re-
cent impact of the rupee appreciation. If you
take a 2-3 year horizon, IT will outperform.
Valuations have also come off, which gives
the opportunity to add to the existing posi-
tions. We are underweight on FMCG because
it is offering very steep valuations for low
growth. Such valuations are justified only if it
is a high-growth story. That has certainly
changed for this sector.
Investing
lessons from the
Prime Minister.
Page 13
A realistic roadmap for
reforms is enough for now
Please send your feedback to
etwealth@indiatimes.com
It has been a promising start
and the NDA government has
made all the right noises to put
the economy back on a growth
path. However, the steps
taken by the government so
far will start showing results
within the next three years,
says Vaswani in an interview
with Sanket Dhanorkar.
Jyoti Vaswani
Chief Investment
Officer & Director
Fund Management,
Aviva India