There should be policy consistency in India: JP Morgan's Tai Hui

'There should be policy consistency in India'

Tai Hui, MD, Chief Market Strategist - Asia, JP Morgan AMC, says a lot of clarity is required on minimum alternate tax (MAT). "You have to be careful in bringing in new policies, especially with retrospective aspects", he adds.

 Renu Yadav   
Tai Hui, MD, Chief Market Strategist - Asia, JP Morgan AMC
Tai Hui, MD, Chief Market Strategist - Asia, JP Morgan AMC (Photo: Vivan Mehra)

Tai Hui, MD, Chief Market Strategist - Asia, JP Morgan AMC, tells MONEY TODAY he remains optimistic about India despite the recent market correction. Excerpts from an interview:

MT: There is a lot of scepticism building in towards the India story. What is your view?

Hui: Twelve months ago, expectations were unrealistic on how much the new government can achieve in a short period. After 12 months, we have to do a reality check on what the government can actually do. I don't think the markets are disappointed or sceptical. It's more about matching the expectations with what has been achieved. From an economic standpoint, I still think India is a great story. In other emerging markets like China, we have seen moderation in growth, but India is on the improvement track when it comes to economic growth. I am optimistic for India over the longer term.

MT: Indian stock markets have corrected a bit in recent times. Is it a good time to enter or should investors wait for some more correction?

Hui: Timing the market is always difficult. If I look at the long-term perspective of Indian equities, I am very optimistic. First, you have domestic investors still to fully embrace the equity markets. For many years, they have invested in fixed income. We started to see some investments coming into equity markets in the second half of last year, but that share is very small. There is a lot of room for pick up from that perspective. Globally, China, Russia and Brazil started the year with very cheap valuations. India, Indonesia, Southeast Asia started the year with valuations around their long-term average. Investors don't feel the urge to go into these markets at this point of time. From a technical perspective, portfolio managers need to catch up with the performance of those markets that have performed well. Most portfolio managers were overweight on India at the start of the year, but it's the underweight that have outperformed. Investors will look from the perspective of growth and reforms. India scores fairly highly on that agenda.

MT: What is your view about the recent row regarding the minimum alternate tax (MAT)? FIIs have pulled out around Rs 3,000 crore from India since April.

Hui: A lot of clarity is required on MAT. More importantly, there should be policy consistency. You have to be careful in bringing in new policies, especially with retrospective aspects. That creates a lot of confusion among investors. FII flows is arguably not the most important aspect because if you look at the past 12 to 13 years, there were net outflows in only two years. To me the biggest change here is domestic investors. If they start to truly embrace equities, it will be a much more powerful driver for the Indian market. For that we need some catalysts like land reforms and the Goods and Services Tax. On the macro side, we need to see better growth numbers, a more concrete rate cut direction by the RBI... Indian equities are competing with fixed income instruments, which are offering very attractive yield with limited risk. You have to give Indian investors a reason to stick the neck out for better returns amid high volatility.

MT: How do you see the movement in the Indian rupee?

Hui: In the next 12 months the dollar will likely strengthen. This is partly because of the policy review by the US Federal Reserve and partly because of the flows back into the US. This means the rupee may see some downside pressure, but the magnitude of the depreciation will be in an ordinary fashion because a lot of depreciation took place back in 2013. After that the RBI has done a lot of good work to reinforce investors' confidence. At the same time, the current composition has improved. The fiscal balance is in a better shape. These will provide more stability to the rupee.

MT: Which economy among the Asian Markets will be the best performing one?

Hui: If you look at economic growth, obviously for China seven per cent growth is very much achievable. Otherwise India, Indonesia are likely to see moderate growth of four to five per cent. In matured economies like Singapore, Taiwan and South Korea, economic growth will be two to three per cent. So, in terms of GDP growth, China is the leader even though it is slowing down. Marketwise again, China had a great start but my concern is the rally in Chinese equities is more to do with liquidity with domestic investors moving money out of bank deposits and real estate into equities. It is not driven by fundamentals, it's not driven by the economy or corporate earnings.

MT: Do you foresee a correction in Indian markets?

Hui: In India, correction is a little more difficult because the fundamentals are okay. As I said earlier, the market rally was driven by fundamentals and a bit of re-rating. My caution is more applicable to China rather than India. The historic data on best and worst annual returns for 10 to 15 years show that Indian market correction during the year can range from 13 to 14 per cent to a maximum 50 per cent (in 2008, the Sensex fell around 50 per cent but then the global markets were also falling). You can still make money by staying invested or if your timing is very immaculate then you can earn good returns. We have no scientific way to predict when the market will correct or when they will bounce back. Staying invested for the long term is not a bad strategy.

MT: What are the key risks for the Indian markets?

Hui: We think the US Fed will hike interest rates gradually. But if for any reason they hike interest rates very aggressively, that is going to be problematic for emerging markets as there will be pull outs [by investors]. Market reactions can be a bit more severe than we expect. And obviously, the inflation problem in India, whether it is because of a sharp rebound in energy prices or a bad monsoon or any other domestic factor that can push up inflation and forces the central bank to tighten the policy. Again, this is not our scenario but it is a risk scenario if that happens. It can put pressure on equity markets. We consider both these situations as low probability events.

MT: What you think of the Greece saga? Do you think Greece's exit from the euro zone is a possibility?

Hui: Yes, I think it's a possibility. We are not saying it will happen for sure but in all our risk assessment parameters we take that scenario very seriously. If you look at the Greek scenario right now, the ECB is printing money, buying assets from around Europe except from Greece. European banks' exposure to Greece has been significantly cut down. The key holders of Greek bonds are the ECB, the IMF and the European Union. It's not the private sector. So, even if Greece defaults, it's going to be extremely painful for Greece and this could create some volatility in Europe. But I think it is much less likely compared to 2010/11. You can see the bond market reflecting that because all bond yields in the past six months have been coming down. Greece's bond yield is going the other way. So, this diversion shows us that the market is feeling comfortable with Greece. There will be jitters and volatility but Greece is not going to drag everyone down with it.