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India is poster child for structural reforms: UBS

business Updated: Jan 01, 2015 23:12 IST
Ramsurya Mamidenna
Ramsurya Mamidenna
Hindustan Times

India represents one of the best corporate sector stories among emerging markets, with strong earnings per share growth of 14-15% expected in 2014-15, global financial services firm UBS has said. There is scope for further market growth and even multiple expansion from current levels, it added.

“In our view, India is the poster-child for structural reform in emerging markets and we expect the set of reforms put in place by the new government to return India to 6.5% GDP growth by 2016,” UBS’s head of global emerging market strategy, Geoffrey Dennis, said in an email to HT.

The 150-year-old firm, also one of the world’s largest global forex players, expects the rupee to hold on its own despite fluctuations.

“As India’s current account deficit (CAD) has fallen and market confidence in the Reserve Bank of India has grown, India has graduated from the ‘Fragile Five’ and is no longer as vulnerable to dollar strength and foreign capital outflows as it was 12-18 months ago,” Dennis said.

CAD refers to the difference between the inflows and outflows of a foreign currency.

Coined by Morgan Stanley, ‘Fragile Five’ includes Turkey, Brazil, India, South Africa and Indonesia as countries that are largely dependent on volatile foreign investment to finance their growth plans.

Investors have been cheering the government’s initiatives with the benchmark Sensex rising 30% in 2014 led by an improved business sentiment that built on a series of bold economic reforms including major steps such as decontrol of diesel and easing of land rules.

But the sharp rise in Indian equities has also fuelled concerns that valuations may have climbed up steeply. Dennis, however, overruled the same. “We view the Indian market as well-held by foreigners and expensive, but it should be. At present, it is reasonably valued for a market that is delivering growth,” Dennis said.

On whether the US Federal Reserve’s planned move to raise interest rates would adversely impact India, Dennis said while the Fed’s campaign to raise rates from June 2015 will be a headwind for emerging market equities, it will not cause a major sell-off.

Typically, a prolonged rise in equities puts the market out of the reach for investors, which then results in sharp corrections as traders try to maximise profits by selling. But if the market estimates valuations to be fair then it widens the scope for more investment to come into stocks and also boosts exits for large investors such as private equity players.