'The stock market crash is an opportunity for the long-term investor’

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HDFC Mutual Fund’s Executive Director Prashant Jain feels the medium-term outlook for the economy is as good as ever

Speaking to Bloomberg TV India’s Abha Bakaya and Priyank Lakhia, HDFC Mutual Fund’s Executive Director and Chief Investment Officer Prashant Jain says India can break away from the pack of EMs (Emerging Markets) to emerge a large and vibrant economy, and a standalone asset.

In the last few days, markets worldwide have been roiled by volatility and uncertainty. Do you expect the volatility to continue because 2016 was expected to be a better year?

Volatility in the short run is the basic nature of equities. The economy and markets are in a very healthy transition – from high inflation and high interest rates towards low; from sharp depreciation of the rupee towards stablility; from high twin deficits to moderate figures. Interestingly, FDI inflows are now bigger than our CAD, which points to a fundamental improvement on the external side. The economy is also transitioning to more capital expenditure-driven growth compared to mainly consumption-driven growth over the last several years.

The markets are also in transition. Transition means that you give up something which has worked for last cycle – in this case FMCG, pharmaceuticals, etc and adopt something new. This will take time as there is reluct-ance to adopt something new, to give up what has worked in the past. This can cause some pain in the short to medium term.

Despite this, I am positive about the economy and markets. It has been observed in the past that whenever Indian markets have corrected around reasona-ble valuations driven by external factors, they have proved opportunities in disguise.

China has just sent jitters across equity markets. Can that be a big worry not just for the near term but for entire 2016?

I am not worried. China and the US are large markets. So whenever they have sharp corrections, it does impact the Indian markets. But such impact is limited to very short periods. It is more important to focus on how the local economy is doing and what the valuations are. The economy is moving in the right direction. The progress has no doubt been slower than what was anticipated for a number of reasons – some local and some global, but six to nine months from today, the recovery will be stronger and more visible. Valuations in India are quite reasonable. Let us not forget that over the last seven years the Indian stock markets have not done anything worthwhile – they are up a mere 20 per cent despite more than doubling of the economy in nominal terms. I look at this fall driven by issues in China as a good opportunity for the discerning and the long term investor.

If you look at the domestic growth story, some pockets like banks and capital goods have not seen a pick-up. How much longer will it take to gather momentum?

If you go back a few years, we had very high inflation and consumption growth was largely driven by fiscal stimulus and high subsidies, etc. That phase is coming to an end. We are seeing a tax-GDP ratio going up and subsidies coming down. That is not good for consumption. So, I think consumption will continue to grow, but at a more sedate and sustainable pace. The real pick-up has to come from the capital expenditure side of the economy. In the first phase, the capex revival is being led mainly by the infrastructure sector, the government and its entities. This is the stage we are currently in. It is also a fact that a meaningful revival in private capex will still take some time because capacity utilisation in the manufacturing sector is below the optimum level. Also, bear in mind that while financial markets tend to think in terms of quarters, meaningful change takes years. To summarise, my opinion is that before the end of next fiscal, economy, capex and asset quality in banks, etc would have witnessed meaningful improvement.

The worry is that faith in the regulatory autho-rities has not returned to a 100 per cent.

With the benefit of hindsight, we can always say we could have done this or done that. What is important is to take corrective actions and to move forward. On that score, there is not much to complain. The good thing is that no short cuts are being resorted to and thus when the impact of changes that have been brought about, or are underway, are visible, these will be substantial and will last a long time.

What’s your expectation about the pace of reforms in 2016?

I have observed that in India change is seldom smooth. Probably because we have a federal set-up, a democratic form of government and India is a large country. Despite these challenges, a lot has been achieved in the last few years – oil subsidies are being phased out, Tax-GDP ratio is improving, fiscal deficit is coming down, there is a sharp improvement in FDI, Jan Dhan and DBT transfers [have been introduced], step-up in government spend on infrastructure, State Electricity Board reforms – these are major steps, [there has also been] good progress in roads, railways etc. News flow in India is seldom positive and the headlines are mostly about what has not been done. My key expectations from the current year are GST rollout and a quick measures to safeguard the steel industry. These have arguably been delayed and are critical to attracting more investments and to create more jobs. Steel investments are without doubt a large opportunity for India.

While there is no doubt that things are improving, there are headwinds. For instance, government outgo from the 7th Pay Commission recommendations and OROP is massive. While government spending has gone up, is it translating into positive results on the ground?

The higher tax collections on petroleum products will go a long way in moderating the impact of the Seventh Pay Commission [recommend-ations], OROP policy, etc. The intent of the government in reducing fiscal deficit is very important given the several means at its disposal. In my opinion, the govt is serious about continued moderation in fiscal deficit. As regards impact on the ground, the timelines involved in reviving capex are long and I feel that the wait to see more action on the ground will not be a long one now. I dare say that the medium-term outlook for the economy is as good as I have ever seen.

What’s the outlook for investors getting into equity? What is the kind of returns we can expect?

Investors can look forward to good returns over the medium-to-long-run – above-average or above-trend returns – because the economy should keep on improving with every passing year and valuations are reasonable. India, over time, will break away from the emerging markets (EMs) – it could be in current year also. While most EMs are in deep pain because they are commodity exporters, India is the biggest beneficiary of the commodities downturn. In the next few years, India should emerge as a large and vibrant economy. It can thus become a standalone asset.

With the kind of flows coming from domestic funds, will retail investors flock to the market?

What we are getting today is certainly more than what mutual funds were getting earlier, but it is still $10-12 billion a year. What are the household savings in India? [It is] $500 billion per annum. So what is flowing into equity funds is just two per cent of savings. Fortunately, Indian investors are displaying a rapidly improving understanding of equities. If you look at the returns from equity MFs over medium to long periods it is very encouraging despite the short-term aberrations. A large number in the country are beginning to understand that. Also, keep in mind that physical assets like real estate or gold are not doing well. I therefore think while there could be monthly or quarterly fluctuations, this is the beginning of a good trend for the next several years.