Thu, 17/01/2013 - 13:18
Avinash Vazirani, manager of the Jupiter India Fund and the Jupiter India Select Fund (Sicav), says a new subsidy scheme for India’s poor and an improving macro-economic environment suggest Indian stocks are well placed to build on the gains made in 2012…
There are two factors that offer some grounds for optimism that Indian stocks, in our view, can build on the impressive gains registered in 2012 when the country’s benchmark equity index, the BSE India Sensex 30, rallied more than 25%. First, an Indian government scheme to replace subsidies for the poor with direct cash transfers is finally being implemented; second, Indian government bonds are, I believe, increasingly pricing in the likelihood of an economy-boosting cut in interest rates.
There is a caveat to this rosy scenario which is the uncertain outlook for the global economy. The Indian equity market does not operate in a bubble remaining vulnerable to outside shocks regardless of the positive domestic reforms that are taking place. A new flare-up in the euro zone crisis or a decision by the Federal Reserve to put an end to its policy of quantitative easing would quite likely have repercussions for the Indian equity market, although less so for the economy.
Cutting out the middle man
Of the reforms underway, the long-awaited rollout of the direct cash transfer scheme will, in my view, prove a game changer. The scheme has been put in place in 20 districts (out of approx. 600) before being extended to the entire country in 2013** in a phased manner, a timetable, I believe, that may prove somewhat ambitious. The scheme replaces a system where village council leaders, for the large part, controlled the distribution of subsidies to the poor. The system, however, was open to abuse by officials, who were in a position to pocket a percentage of the subsidies before handing them over to the rightful recipients, or inflate the subsidies they received from central government by registering a significant number of duplicate and fake claimants.*** This skimmed money rarely ended up benefiting the Indian economy as it would often be invested in black market fixed assets such as property, gold and diamonds.
Under the direct cash transfer scheme, the ability for corrupt officials and middlemen to take a cut of the subsidies is lessened and fake and duplicate claimants are minimised significantly, if not totally eliminated. Subsidies are paid directly into a recipient’s bank account that is linked to the biometric unique identification number given by the authorities. The result is that more money, in our view, will be going into the hands of people with the greatest propensity and need to spend it whilst reducing government expenditure as a result of cutting down leakages.
Impact on consumer stocks and banks under-appreciated
From an investment perspective, it would follow that Indian companies focused on the consumer are likely to be some of the key beneficiaries from the rollout of direct cash transfers. Our portfolio reflects this view, with consumer stocks accounting for more than 30% of our holdings. We think analysts underestimate the positive impact on consumer-facing companies of millions of poor people about to find themselves with a lot more money than they ever had before in their pockets. As a result, it is our view that earnings growth among consumer stocks may well be subject to upward revision.
Banks should benefit from having a significant number of new account holders, and consequently a large float, and an increase in cashless transactions.
A second important driver for the Indian economy has been the growing expectation that the Reserve Bank of India will finally proceed with a long –awaited cut in interest rates, with inflation now at 3 year lows. The market already seems to be pricing in the announcement of a rate cut at the bank’s policy meeting on January 29, with the yield on Indian 10-year government bonds languishing near-two year lows since the start of the year. Some of the biggest beneficiaries of this drop in rates have been the country’s public sector banks, a sector where we have several key holdings. The current consensus is that the central bank will cut its key repurchase rate by 25 basis points to 7.75%. When it does, it will provide, in our view, a massive boost to market sentiment as it will signal a true start to the monetary easing cycle with long-dated bond yields likely to fall further.
Scepticism about the ability of the Indian government to push through and implement reforms has often blighted the investment outlook for the country, but we believe we are finally seeing some concrete action. Government impetus is largely due to an election timetable that sees a number of state elections over the next 12 months culminating in a general election in the first half of 2014. The current Indian government will do all it can to ensure the results of those elections go its way.
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