India’s credit rating to get downgraded; reforms on hold: Adrian Mowat

New Delhi:
In a discussion with NDTV Profit’s Prashant Nair and Devina Menon, Adrian Mowat, Managing Director & Chief Asian & EM Equity Strategist, JPMorgan, speaks about India’s growth struggle, downgrade warnings and currency issues. He says that India’s credit rating is likely to get downgraded, but markets will not react to the downgrade. “Stagflation issue is not discounted by markets,” he adds.

 

He thinks than stocks in the private sector banking, consumer and engineering construction would do better.

 

Below is the complete interview. Watch the accompanying video here.

 
 

The recent weakness in the Indian rupee is overwhelming. Is the currency market pre-empting a rating cut for India? What is the rupee factoring in?

We have a risk-off trade at the moment. There is general weakness in the emerging market currencies; equity markets are going down.  As far as the rupee is concerned, it is a currency of a country with high fiscal deficit. When the currency depreciates, your exports become more competitive. At times, the currency weakness is good for economic growth.

 

 In you assessment, what is the chance of India’s rating getting downgraded by one of the rating agencies?

There are structural issues in India, which the rating agencies are concerned about. India’s reform programme has been pretty much on hold. Businesses in India are concerned about the lack of direction from the Indian government. India has current account and fiscal account deficits, which is an old story. I think there is a chance that India will get downgraded in its credit rating. However, markets may not react much to the downgrades.

 

Where does India stand among the BRIC nations in terms of valuations and relative fundamental strength?

We are overweight on India among the other BRIC nations – Brazil, Russia and China.  The Indian market is the most expensive market among the other markets on a PE basis. If I would want to buy in China, it is much more expensive than the Indian market. 

We have seen weakness in this market, weakness in the currency. If we think about how 2012 finishes, the monetary policy has eased. We have a more competitive currency. What happens when the monetary policy is eased, people expect the economy to wake up immediately, but that’s not the way it works. The stock markets are sensitive to the easing cycle and not the economic data.

 

JPMorgan turned bullish on India recently. What was the main reason behind it, valuations? Are your models capturing risk from slowdown in decision making and stagflation?

There are very few decisions passed by the government; there is a policy paralysis. This reflects in the valuation of the current equities. The issue of stagflation is not discounted in the market. The way we would approach this is that the demand within the economy has weakened and inflation has followed that.  The global commodity market is entering a bear phase; crude oil is down and other energy components and industrial metals are coming off. I’m confident that India’s inflation problem, which has been stubborn, will improve by the next couple of courses.

 

How did you rate the RBI's stance at the mid-quarter review? To what extent can we afford to sacrifice on growth to keep inflation under check?

I think the important message from the central bank was that they can’t manage this economy with a fiscal deficit. It is a big cause of why India has a tendency towards inflation. Addressing fiscal deficit and getting more efficient with the fiscal resources is the strategy to follow.

 

 If you are overweight on India, which sectors are you looking at from the investment point of view?

We are hoping to see more reduction in the interest rate. Private sector bank stocks are well-placed for that. Indian private sector banks are one of the few areas in the emerging markets that have seen EPS upgrade. We also like the consumer sector with the view that as policy eases, we see an improvement in the consumer sentiment. The other area is engineering and construction. The base effect is so favourable now that there companies have started looking good. What we like about the Indian market is that there is a broad range of stocks we are interested in.

 

 How do you see FII flows panning out in the rest of 2012?

I really don’t have an answer to that question. If we see the US economy stabilising and a concrete settlement of Eurozone problems, then money will flow to equities, which also includes emerging markets and Indian equities. It is much more important to focus on the local fundamentals. On the techno-based, what I like about the Indian market is that the fixed deposits are offered as very attractive investment opportunities. And as monetary conditions are eased, then on a relative basis, the Indian equities are going to look more attractive.