Excel Funds Management Inc.

Emerging Markets

Are stars aligning for the Indian markets?

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When it rains it pours. After a long period of policy inaction, on Thursday the Government of India increased the prices of diesel and limited the quantity of subsidized LPG cylinders per family. The very next day it cleared the following three key proposals:

  1. Foreign Direct Investment (FDI) in multi-brand retail up to 51% and 100% for Single brand retail
  2. FDI in domestic aviation allowed up to 49% from foreign carriers
  3. FDI in broadcast services up to 74%

In addition, disinvestment from four Public Sector Undertakings namely Oil India, NALCO, Hindustan Copper and MMTC targeting to collect INR 150 billion was also announced. Earlier in the month, the Government-appointed committee on the much-debated General Anti-Avoidance Regulations (GAAR) recommended a delay in implementation, removing a crucial overhang on investor sentiment.

FDI in Multi-brand Retail

The Government has approved FDI up to 51% in multi-brand retail (currently foreign portfolio investors can hold up to 24%, but no FDI is allowed). Now the the final authorization is left to the individual states. Nine states and three union territories (Andhra Pradesh, Assam, Delhi, Haryana, Himachal Pradesh, Maharashtra, Rajasthan, Uttarakhand, Jammu & Kashmir, Daman & Diu, Manipur, Dadra and Nagar Haveli) have already shown support to FDI. Retail outlets can be set up in cities with population of more than 1 million and 50% of FDI investment must be spent in back-end infrastructure.  As per a McKinsey study, India has the potential to attract over USD 15 billion in FDI flows over the next 3 years in the retail sector alone.

 FDI in Domestic Aviation

Global airlines can now invest up to 49% in the Indian Aviation sector. Due to high oil prices globally airlines sector is undergoing lean phase. Some airlines in India are reeling under high debt, it will be very interesting to see the developments in this space. Saving the airlines sector also has major implications for the banking sector which has significant exposure to the aviation sector.

 FDI in Broadcast Sector

The FDI limit for all TV distribution platforms has been raised from 49% to 74%. This is hugely positive for the digitization process. Around INR 250-300 billion is required for the digitization process and this is one of the few sectors in India where Government had set deadlines for implementation.  Structurally speaking, this is an inflection point for the cable TV industry in India which is the largest market in the world in terms of number of cable TV subscribers.

 Market Impact:

 The Indian markets have suffered a overhang of negative sentiment over the past 7 months as there has been a perceived ‘policy-paralysis’. The Indian Parliament remained deadlocked in August and September – further impacting investor sentiment towards India. The actions by the Government on Thursday and Friday represent a renewed vigor, and a do-or-die attempt by the Government to get back economics as the main political agenda. The measures of last week, along with the likely dilution and delay in implementation of GAAR norms as recommended by the committee, address the concerns of foreign investors and would help kindle the ‘animal spirit’ of local businesses (the wish expressed by the Prime Minister last month).

There are also expectations of a significant reshuffle in the Central Government Ministers, with pro-active and efficient personalities being introduced and non-performers being replaced. It may also be noted that India now has Mr. Chidambaram as the Finance Minister and he has the reputation of being industry and market-friendly.

Apart from the recent measures, for the past many months, the Prime Minister’s office has been directly involved in monitoring the progress of large investment projects. We also saw the Prime Minister’s office taking measures to solve issues in the power sector since last year, following which many States hiked electricity prices under indirect pressure from the Central Government.

Petrol prices were hiked sharply in May and now a sharp hike in diesel prices indicates an inclination to take hard, politically sensitive and unpopular but economically sensible decisions. We have seen over the past few years that India has repeatedly elected State Chief Ministers who have delivered growth and prosperity. Politicians would not be oblivious to this fact. Government finances still offer leeway to attract flows, with the right approach.

To put the events in perspective, let’s look at the chronology of developments over the past few months. 2011 was a forgettable year – corruption scandals and public outcry paralyzed Government decision-making. 2012 started with the Government taking steps to actively sort out urgent issues, especially in the power sector – the markets bounced sharply in December 2011 till February 2012. However the ruling party fared badly in key state elections and
economic issues took a back seat in March-April.

The main issues concerning foreign investors were:

  1. Cancellation of Telecom Licenses by the Supreme Court in the wake of corruption allegations in the allotment process. This is now past us and the Government will auction the spectrum in a transparent process by the end of the year.
  2. ‘Retrospective’ tax changes on offshore transactions where the underlying assets are in India. The Government has indicated that this provision will be used only in very selected instances and not as a general rule.
  3. Introduction of General Anti-Avoidance Rules (GAAR) in February. In September, after feedback from investors and business, the Government-appointed Shome committee has recommended a significant pruning of the scope of GAAR, approval by an independent Advisory Panel before it is invoked, a three-year deferral of its implementation, an exemption for mutual funds and other pooling vehicles making investments through low-tax treaty jurisdictions like Mauritius and Singapore, and grandfathering of investments made prior to its implementation. These elements aim to restore investor confidence in Indian democracy and provide certainty to taxpayers.
  4. Coal and mining. The recent report of the Comptroller and Auditor General of India has given ammunition to the opposition parties who are alleging corruption in allotment of coal blocks. Delays in land acquisition and environmental clearances have also delayed mining and power sector projects. Many of these are projects with billions of dollars already invested in power producing / metal manufacturing facilities. Another big set of projects under stress are the ones depending on Indonesian coal supply through their own mines. Changes in taxes and rules in Indonesia have upset financial calculations and these projects need changes in (contracted) tariffs to remain viable. The Prime Minister’s office is regularly coordinating with the ministries of Power, Coal, Finance and Environment to expedite decision-making for these pending issues.
  5. Slowdown in GDP and Industrial Production Growth. Media and industry have been extremely critical of the Government on this issue.
  6. Threat of a sovereign downgrade by international rating agencies given the fiscal and current account deficits. The hike in petrol, diesel prices and reduction of LPG subsidy are steps to address the fiscal issue.

Hard decisions are usually taken in tough times. The market sentiment, dismal growth numbers, criticism by the media and industry and a weak currency have driven the message home and rung alarm bells in the Government. The average Indian is now keenly concerned about growth and employment, a fact that politicians cannot ignore.

The Prime Minister has taken a courageous call. The opposition and many of the Government’s own allies will likely criticize and protest against all the measures. The next few weeks will re-test the Congress party’s will to push through reforms and stimulate economic growth. We hope that there will not be any back-pedaling (like we have seen in some cases in the past).

In the market, growth expectations are low, confidence in policymaking is abysmal and the currency has been marked down a lot. We believe that the concerns are discounted in valuations which are trading at 2008 levels. Small changes in expectations and improvement in the reality would be a significant trigger for the markets. Moreover, India is a high-beta market in the global context of risk-on/ risk-off trades. The introduction of QE3 by the US Fed will likely continue the risk-on sentiment globally – an added benefit for India in the short term.

Risks to India are a) the unpredictable nature of coalition politics. If the allies of the ruling party adopt a hard-line against the measures, it may precipitate a mid-term election if other parties don’t agree to support the Government b) any negative for global risk-appetite is also negative for India as the country needs a continuous supply of foreign capital to fund the current account deficit. We will of-course not forget that to upgrade the long-term growth potential, the Government needs to address many other issues like land acquisition, labor reforms, reducing corruption and red-tape and further reduce the fiscal and current account deficits and subsidies (food, fertilizer and fuel subsidies). The measures last week are small steps in a long journey.

Sector outlook:


Consumption remains the bedrock of the Indian economy. We prefer the consumer discretionary sector (automobiles, auto-ancillaries, media and retailing) sectors and are overweight in the sector. Consumer staples also has predictable growth but the valuations are expensive we are  hence neutral to underweight in the sector.


We believe that interest rates will gradually come down in the rest of the financial year. We are however also concerned about increasing non-performing assets in the sector. Hence we prefer private sector banks compared to public sector banks. If we see economic growth picking up,  we will look to increase exposure to the sector.

IT and Healthcare:

These are sectors where we see secular growth as they represent the core strengths of India. We are neutral to overweight on the sectors. In the short term, there is an overhang on the healthcare sector in the form of a Supreme Court directive to the Government to overhaul the pricing policy of domestic medicines – it may be a short-term negative for the sector.


The industrials (capital goods, infrastructure, engineering, construction) sector is the most crucial for the long-term India story. This sector will determine the long-term growth potential of India. It is also the sector of maximum Government focus. The funding requirements are large for both debt and equity and this is a challenge that the country needs to address in a smart way. The Prime Minister has mentioned that India needs USD 1 trillion over the next 5 years in this field. The sector was the sunshine sector in the previous boom of 2003-2008 and has been the worst performer since then because of implementation and execution issues. The sector has great potential and we are monitoring developments very closely. We are currently overweight in the sector and would look to increase the overweight stance.

Energy, Utilities and Telecom:

We are underweight in the sectors as these are prone to Government regulation and interference. Moreover, in telecom there is intense competition and large capital requirements in the coming years.


We are neutral to underweight in the sector.


Author: Excel Funds Management

We Are Leaders. Our Focus is Undivided. Excel Funds is Canada’s specialist in Emerging Market investment opportunities. We pioneered Emerging Market mutual fund design and distribution in Canada. Our focus is undivided – Emerging Markets is all we do. Our Mission Is To Offer Canadians True Global Access By offering Canadians access to rapid growth markets, Excel Funds provides truly global and diverse investment value. Our clients want consistent, responsible and intelligent solutions – we will never stop being challenged and deliver on client expectations. We Listen. We Are Determined To Deliver. Our clients want to understand better. Excel Funds is the only company dedicated to providing investors with actively managed, best-in-class Portfolio Managers based in regional markets. In order to deliver deeper understanding, we are not removed from unique cultural, political and economic experiences. We Initiate. We Create. Investors benefit from strong, sustainable growth. To create wealth for our clients we will: • Offer globally diverse opportunities to capture shifts in world economies • Not resist change and continually lead in Emerging Markets global growth • Engage world class institutional managers for retail investors We Are Passionate. We Will Never Stop Innovating. True leadership is enabling and seeks a positive outcome for all invested. We will not rest on past success, and continue to provide clients with: • Innovative fund structures • Canada’s largest & most comprehensive Emerging Markets products • The best institutional level Portfolio Managers • World class on-the-ground active managers • A singular focus on Emerging Markets, the driver of global growth

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