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Tuesday, November 13, 2012

‘Possible Oil Spike may be the Only Danger to Economy’


HDFC Asset's Prashant Jain says there are reasons to be optimistic after the new round of reforms

India's best known and welltracked 
money managers, Prashant Jain, is bullish on the mid- to long-term prospects of equities market. "Policy framework in infrastructure and natural resources is improving. Lower interest rates and thinner deficits in the future should lead to faster economic growth," says Jain, the chief investment officer of India's largest fund house, HDFC Asset Management Company, with assets under management of . 97,773 crore. Spurt in oil prices coupled with an overtly populist budget and repeated scam allegations could hurt investor sentiment, he said in an interview with ET's Shailesh Menon. Edited Excerpts: 


Is there a perceptible change in the way you see India after the policy announcements in September? 
What we have seen so far is largely a correction of some of the earlier deficiencies. However, what is welcome is the change of direction and the communication of intent to take the economy forward. So, yes, there is optimism that things will move in the right direction, but a lot remains to be done. 
Is the worst over for Indian economy? 
There are reasons to be optimistic about the economy. The growth drivers of Indian economy are strong and sustainable and thus the economy grows even when the policy or external environment is challenging. If the good beginning is taken forward, then, in my opinion, the worst should be over for the economy. Consumer spending is showing a moderation, which is good in the current inflationary environment. Capital spending should revive, albeit with some lag. Interest rates should also be lower one year down the line. Economy should grow at a faster rate next year. A key risk is a spike in oil prices. Given the high fiscal/ current account deficits, the ability of the economy to with
stand an oil spike is limited. On the other hand, a fall in oil prices should help in faster recovery. 
Despite the government's road map for growth, Indian corporates are not very sure about making capital investments. 
In my opinion, capital investments have slowed down due to a number of reasons: lack of a proper regulatory framework in key infrastructure areas, lack of co-ordination and prioritisation in the power sector, particularly between coal mining, distribution reforms and generation, inadequate experience or weak balance sheets of companies implementing large projects and high interest rates… These are not issues that can be solved overnight. However, the direction now appears to be right and given some of the recent changes and some key expected steps like the National Investment Board, coal pooling, etc. In my opinion, capital spending should revive in next 2-4 quarters. 
What are your thoughts about the Reserve Bank of India's move to keep rates steady? 
RBI has a good track record and an excellent reputation, so in my opinion we should accept its decision as the most appropriate one in the prevailing circumstances. At the same time, there are reasons to be optimistic about lower interest rates in a not too distant future. 
There are worries that the next budget will have a lot of populist measures. 
The fiscal room is very limited for populist policies. Besides, in my opinion, the revival of economic growth will be more effective than giving subsidies. However, the food bill could put some pressure on fiscal deficit. Hopefully, this should be counter-balanced by rationalisation of some social programmes and by fasttracking direct transfer of subsidies to cut leakages. The budget should focus on improving tax/ GDP ratio primarily by effective tax administration or removal of exemptions and also through some increase in tax rates wherever neces
sary. Elimination of diesel subsidies is also very important, even though it is not linked to the budget. 
Has there been any impact of several scams on the overall investment climate? 
These have clearly hurt investments. Having said this, in my opinion, every crisis is an opportunity for change and the current challenges will lead to a change for better – in future, this should lead to a more transparent and effective policy for use of natural resources. It must however also be kept in mind that the manifold appreciation in prices of several commodities over the last ten years has multiplied the numbers being discussed several-fold. 
How have been the second quarter results? Is there a definite drop in demand? 
Results have been marginally better than expected, barring a few instances when some companies have reported lower numbers. Select banks have reported higher-than-expected slippages and some engineering companies have reported disappointing results. Most of the slowdown, which we have been experienced so far, is in urban demand, rural demand is still holding up. 
What's you medium-term outlook for markets? 
Iam optimistic about equities markets 
over a mid- to long-term. This is so because, even though belatedly, the policy (and regulatory) framework in infrastructure and natural resources is improving. This along with lower interest rates and thinner deficits in the future should lead to faster growth. Valuations are below average and thus returns should be aided by an improvement in valuations apart from earnings growth. 
Some money managers do not see value in paying 14-16 times price-to-earnings for a projected sub-10% growth in Sensex companies. Are you comfortable with current valuations? 
In my opinion, a 10% earnings growth for next year is pessimistic. With lower interest rates and hopefully better economic growth next year, profits should grow faster. A 14-16 times price-toearnings for a similar growth in profits is not demanding, particularly if growth rate is sustainable for long periods. 
What investment strategies are your adopting currently? 
Our investment strategy has been consistent over time to focus on strong, well managed, growing and reasonably valued businesses. In my opinion, any economic recovery should be led by investments and not by consumption. Therefore, I expect businesses linked to investments to do better over time.



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