‘Equity Valuation in India has Become Attractive Now’

The absence of policy action is making investors wary of India, said Dixit A Joshi, managing director and head of Asian equities, Deutsche Bank. In an interview  with Shailesh Menon, Joshi said investors fear that political constraints may limit the government's ability to act decisively to manage an eroding economic environment and possible external shocks. Excerpts:  Last year you told us markets would turn around in the second half of 2011. It has not really happened. What's your reading now?  High commodity prices, lack of policy action, inflation and higher rates — the headwinds were much more severe last year. Some of those factors have dissipated now. Equity valuation in India has become more attractive and we're beginning to see healthy inflows into domestic equities. I am not bullish on Indian shares, but I think some of these negative factors will be resolved or be less negative than in the previous years. As the macroeconomic backdrop improves and we begin to see some small policy action, I think the investment pattern could turn in favour of India. The GDP growth falling to nine-year lows is worrying, especially as capital formation has deteriorated sharply. The government needs to adopt bold measures to facilitate capital formation and infrastructure creation, which should address concerns of both falling growth and sticky inflation. The government moving into an inclusive-growth overdrive in a pre-election year will be seen as a negative as it will fuel worries over large slippages in government finances.  What are your major worries with regard to Indian equities?  Higher commodity prices will cause problems for India. If prices go up, the impact on India and the rupee will not be good. It is important for us too see some policy action or steps in that direction. There is a lot of negativity with regard to investing in India. But to weed it out, we need a few simple policy actions. I think the recent government-level changes will have a positive impact... Foreign investors are not really worried about 'no' rate cuts by RBI, they are more concerned about resolution of issues like GAAR. While investors remain hopeful that the finance minister will be able to deliver on some policy measures, the absence of any action so far is making them wary. Investors fear political constraints may limit the government's ability to act decisively to manage an eroding economic environment and possible external shocks.  Are you worried about the frequent regulatory changes effected by the Indian government?  From my vantage point, I look at markets across the globe. Regulations and the focus on regulations are more intense now than it has been in many years. India is not any different. And as investors, even we want a robust regulatory regime. Let's be clear about it, it is a misconception that lax regulation encourages investments. Investors want robust regulatory regime which makes it safe for investors.  How would you compare India with other key emerging markets?  India is facing a lot of local headwinds in the form of a weak macroeconomic environment and policyrelated issues. Regulatory moves like GAAR have also created a drag. In China, a large number of policy measures are being taken — all with a view to stimulate growth and encourage inward investments. That said, China is going through a phase of slowdown.  How are investors reacting to the crisis in Europe and slowdown in the US?  It is quite a fluid situation in Europe. The ECB has sent out a strong message that it will do everything to protect the Euro. A lot has to happen over the next year or two. Much of it has a bearing on politics and the European banking system. Crisis resolution also depends on how nations respond to tough fiscal measures around the Eurozone. It's quite a complex environment out there. The focus now has shifted away from Greece to other core issues in Europe. This has been immensely helpful. In the case of US, there's a fiscal cliff, which we are clearly worried about. The risk-taking capacity of investors is actually pretty light now. In some cases, it is the lowest in five years. If you look at hedge fund exposure, net exposure right now is in the region of 15% and that's the lowest in five years. This partly reflects the view that in an environment where political announcements are influencing market direction week after week, it makes for a very hard investment climate.  What are you pitching to your clients now?  Investors should start allocating money to equities now. It is important to take a long-term approach. For instance, equity allocations globally are at very low levels. Volatility levels are also ranging low. Probably in many cases, it is the lowest in five years. A smart way to move back to equities (from debt investments) is to buy call options. This strategy allows investors to get a cheap long-term exposure to equities. You need to nimble in this market. The market does throw up opportunities every other week. We are very constructive on private sector banks, but we do not urge investors to reduce focus on consumption names either... stay invested in consumption names as we believe by the end of the current calendar year, the government's focus on 'inclusive' growth will intensify as the country moves into a preelection year in 2013.