Thus, valuations are quite reasonable and in fact for many large companies the dividend yields are now equal to bond yields.
With lower tax rates, India can become an attractive destination for relocating manufacturing operations, which can spur private capex cycle, boost wage growth and thus, consumption, says Prashant Jain, executive director and chief investment officer at HDFC AMC. In an interview with
Chirag Madia, he further added that there was no reason for investors to stop their systematic investments plans (SIPs). In fact, retail investors should increase allocation to equities.
What would be the impact of the recent announcement by government on corporate tax cuts on economy and markets?
In my judgement, it could be a game-changer. Economy was falling in a vicious circle of weak growth in salaries of white collar employees, low consumption and weak private capex. Lowering in tax rate is likely to boost profit growth, improve sentiments, kick-start private capex and make India a favourable investment destination. Timing of tax cuts could not have been better as two largest economies of world are renegotiating their trade terms and companies manufacturing in China are looking for a new destination to relocate their factories. India is a logical and natural choice with large skilled and English speaking populations, stable government, geographical advantages, etc. However, Indian tax rates were not competitive and countries like Vietnam, Bangladesh, Thailand, Singapore, etc, have a lower tax rate compared to India. With lower tax rates, India can become an attractive destination for relocating manufacturing operations, which can spur private capex cycle, boost wage growth and thus, consumption. Though fiscal deficit might widen slightly but it should not be a cause of concern as given the weak credit demand, it can be absorbed without impacting the yield significantly. Thus, it is a very timely and apt decision.
What is your view on the slowdown in the economy, when can we see the recovery?
India’s growth has indeed slowed over the past year or so. The slowdown is most visible in consumer discretionary expenditure. Consumption over last few years was sustained by higher borrowings and lower savings by households. This is evident in the significant rise in household debt over past 10 years or so. However, there are limits to debt-driven consumption. While Indian household debt/GDP is still below global levels, adjusted for higher interest rates in India, the room for meaningful increase appears limited, especially in view of the weak growth in wages. The main reason for slowdown in white-collar wage growth is a weak private capex, especially in new projects for last nearly 10 years. Thus, the key to reviving economic growth and consumption on a sustained basis is revival of private capex.
When can we see private capex cycle improving?
To revive private capex cycle we need to do few things — first, pending IBC cases need to be resolved quickly. This is because there is no incentive for a player to set up new projects when one can buy existing assets in metals, power, infrastructure, etc. at lower than replacement costs and without the hassles of setting up a new project. Speedy completion of IBC cases can thus go a long way to revive the private capex. Secondly, the government should consider deferring the divestment plans in capital markets of PSUs for near term as it is leading to crowding out effect in equities and reducing equity capital available for private sector for capex. Alternative routes like higher dividends, inter-company or strategic sales should be explored. Presently, the supply of equity capital is limited compared to debt and it will help if the government adopts a counter-cyclical approach of raising more debt and less equity for meeting the fiscal deficit.
How do you look at Indian markets? Do you see more correction going forward?
It is very tough to predict the equity markets performance in short term. Investors should look at medium- to long-term returns, say, at least 3 to 5 years. Historically, market returns over the long term have been closer to nominal GDP growth and it should continue going forward as well. There are many factors because of which market outlook is favourable over medium to long term. Firstly, India’s market cap to GDP is near all-time lows. Also, valuation multiples across sectors except consumer discretionary and consumer staples, are near or below long-term averages. Thus, valuations are quite reasonable and in fact for many large companies the dividend yields are now equal to bond yields. Markets thus hold promise over the medium to long term, in my opinion, for the patient investor. One important development that has been ignored is the fall in interest rates. Lower rates make equities more attractive. Interestingly, presently the earnings yield on equities is nearly the same as bond yields!
If one looks at the performance of HDFC Top 100 it has delivered annualised return of over 19% since inception and has outperformed Sensex returns (13%) over the past 23 years. Thus, it has done well across the three major cycles and various phases of market during this period. However, in recent past, the performance has been muted. Any comments on that?
This is correct. Most active funds, especially large-cap oriented funds have not been able to add value in recent past. This is because on one hand the stock market returns have been led by few stocks and on the other the market returns over last few years have been muted (in the range of 5-8%). Specifically for HDFC Top100 overweight position in corporate banks and underweight in consumer staples has hurt performance. If you look at the track record of this fund over last 20 years or so, the fund has under-performed on few occasions, but it has caught up over time. We remain hopeful of the same this time too.
What strategy should investors adopt at this point of time?
In fact, at any point of time, asset allocation towards equities should be a function of individual risk appetite and should be carefully assessed from a long-term perspective. While equities are a rewarding asset class in the long term, over short to medium periods they are risky and uncertain. Hence, only that portion of wealth that one can set aside for next 3 to 5 years at least and on which one can tolerate volatility, both emotionally and financially, should ideally be invested in equities. I see no reason why investors should stop their systematic investments plans (SIPs), if risk appetite permits; they should, in fact, increase the allocation to equities. The rest should be invested in safer asset classes like debt funds, etc.