Nikko: Be patient with India reforms

Added 31st July 2015

After a good run in 2014, Indian markets have disappointed investors this year due to lack of improvement in corporate sector earnings and no major progress in big reform initiatives.

Nikko: Be patient with India reforms

Year-to-date, India’s key indices -- the Bombay Stock Exchange’s Sensex and the National Stock Exchange’s Nifty -- rose just 0.7% and 1.1%. The MSCI India is up by 3.6%.


Despite this, Nikko Asset Management is patient with Asia’s second biggest economy.

The firm has retained an overweight view on India as it sees long-term economic growth potential and believes that reforms should start bearing fruit in the medium-to-long term, said Peter Sartori, head of equity.

“There is unlimited potential in India and it is a good long-term story. We expect reform implementation in three-to-five years,” said Sartori.

“We continue to view India as the market with the most structural growth potential in Asia over the medium-term and remain confident that the current government is addressing some fundamental bottlenecks that have constrained growth in the past,” Sartori wrote in a recent market report.

Investors are closely monitoring two key reforms: goods and services tax and the land reform bill.

However, both bills were halted during during parliament sessions in May and questions have been raised over the new government’s ability to kickstart the economy.

But Sartori is optimistic that the government will be able show concrete progress over its five-year term.

“It [reform implementation] will take time, there will be some setbacks. Our five-year plus view is that the government will get it through.

“We are in the camp ‘two steps forward, one step back’. But if it goes to ‘one step forward, two steps back’, we might have a review [on India].”

Since the Modi government came to power, India has taken a few steps such as increasing foreign direct investment in the insurance, railways and defence sectors.

An initiative that will give residents in rural areas access to bank accounts was also announced.

Apart from that, India is looking to scale up its manufacturing industry with the "Make in India" campaign that is aimed at encouraging companies to start their manufacturing activities in the country.

Moreover, the Reserve Bank of India has followed other central banks and cut interest rates three times to stimulate the economy.

The stewardship of India’s central bank tends to get high marks. Geoff Lunt, product specialist in Asian fixed income at HSBC, speaking at a recent Last Word Media event, said RBI head Raghuram Rajan “has not put a wrong foot forward since he started in August 2013 in the maelstrom of the taper tantrum”.

Market overreaction

Nikko increased its exposure to Indian markets after elections in May last year, when the Narendra Modi-led government was voted in with a clear mandate to carry out structural reforms, said Sartori.

Indian markets fared well as investors held optimistic expectations for the reform process.

But around December the markets had over-reacted, sending indices high. Investors believed Prime Minister Modi could deliver on all reforms in the first year. “It indeed does not work that way,” Sartori said.

He said during the rally he pared exposure to some Indian stocks and booked profits.

In 2015 so far, the market has started consolidating and valuations of some stocks became more reasonable, he said.

The firm saw it as a buying opportunity and over the last six weeks added India equity exposure.

The firm favours financials, healthcare and infrastructure-related companies. Infrastructure is an opportunity because it is on the government's list of things to improve. 

Market impatience

Nikko is not a voice in the wilderness. UTI Asset Management and Franklin Templeton Investments also maintain a long-term positive outlook on India.

Matthews Asia, however, pointed out that India’s markets are down because they are reflecting impatience with reform implementation.

“The market wasn’t priced for struggling through the bureaucratic inefficiencies and so India looks more challenged in terms of valuations and has had a weaker year so far compared to 2014,” Robert Horrocks, chief investment officer, wrote in a recent research note.

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