Indian companies in cyclical sectors are trading at a huge discount to valuations and will be some of the largest beneficiaries of the Modi effect, according to HSBC Global Asset Management.
Reforms from prime minister Narendra Modi have passed government subsidies to individuals’ bank accounts rather than intermediaries, leading to greater bank account use among Indians and the building up of credit histories.
The reforms have led to the building of ‘smart cities’ to house new technology industries and the cutting of subsidies propping up inefficient industries. Above all, the reforms and the vision of Modi have led to a wave of business confidence.
Puneet Chadda, chief executive of HSBC Global Asset Management India, who has been visiting investors in Sydney and Melbourne this week, sees consumer discretionary industries, banking, car manufacturers and infrastructure as the sectors that will benefit most from reform of the Indian economy. By comparison he sees Indian defensive stocks as fully valued.
“Some of these sectors are going to be volatile as there will be regular news flows around these sectors,” said Chadda, “but on balance we think they will present a very good risk reward over the next three years.”
Chadda is much enamoured with Modi’s impact.
“In the past we gave people a sense of entitlement. People were looking for subsidies, for job reservations,” he said. “With Modi, what you have is a person who is saying let me create the infrastructure to allow people to be entrepreneurial, to get more skills, build more cities so that the pressure on urban migration is reduced.”
A key measure of Modi’s is restricting subsidies on oil and agriculture to allow more efficient businesses to thrive and inefficient ones to fail.
Chadda said that until now Australian investors, unlike US and Japanese investors, had largely avoided direct investments in India. One trend he is seeing among such investors is the view that countries such as India and China are separate from the emerging market sector.
“Increasingly there is a realisation that India and a few other countries are breaking away from the EM pack and strongly deserve to be treated separately. People are starting to look at India and a couple of other EM countries through the prism of proven country investment.”