Mumbai: Manishi Raychaudhuri, head of Asia (ex-Japan), equity strategy at BNP Paribas Securities, expects the US Federal Reserve to increase interest rates in December. In an interview, he says he continues to expect emerging market equities to outperform developed market equities. Raychaudhuri has an overweight stance on China, India, South Korea and Thailand in Asia. Edited excerpts:
Now that the US Federal Reserve and Bank of Japan’s (BoJ) decisions have arrived, what do you make of these developments?
The common thread running through both the policymakers’ decisions is that they both decided to keep interest rates unchanged. However, the approaches are different. BoJ wanted to steepen the yield curve considerably as they are beginning to understand that a flattish yield curve hurts banks’ profitability and clearly they wanted to correct it. The Fed, on the other hand, are trying to signal that the normalized interest rates for the US are now a lot lower than they used to be historically. Our guess is that a rate hike will happen only in December. We also believe that this particular rate hike cycle will be much more benign than the previous three or four that we have seen.
What does it mean for emerging markets, including India?
Over past rate hike episodes spanning 45-50 years, only once did the US dollar appreciate. In all other episodes, the dollar either depreciated or just stayed flat. So, if that is the case, there is no strong case for the appreciation of the US dollar, and the rate hike episode is likely to be much more dovish that we have seen in the past; then the necessary conclusion from there is that the money flows into emerging markets and Asian equities may not really suffer as badly as we have seen in the past. For the last 8-10 months, our basic point of view has been that the emerging markets equities should outperform the developed market equities. That stance remains intact.
In Asia, which equity markets are your best bets?
We are overweight on China, India, South Korea and Thailand.
Why do you think China is attractive?
Even as China is facing the problem of a growth slowdown, we think if the stock selection is done correctly, there are enough bets in China which portfolio managers can focus on. If we go back 25 years, the basic expenses of a Chinese household amounted to around 60% of its income. Over the years, that has dropped to around 40-43%. What is growing is education, health, leisure, consumer discretionaries and so on. We call this theme “Changing China” or “New China”.
What makes the Indian market an attractive bet?
India is relatively a safer and easier story than China, because while China is slowing down, India is moving exactly in the reverse direction. If you go back to two years, the real GDP growth was around 5-5.5%, now it is at around 7-7.5%, and it will possibly settle at around 8% or so. Interestingly, during this growth recovery phase, India is still in a period where interest rates are declining. That is the Goldilocks scenario. It is a rare combination to find in emerging markets today.
Tepid rural consumption was holding back earnings growth for the last couple of years. Due to the good monsoon and implementation of the recommendations of the Seventh Pay Commission, rural consumption is expected to grow from here, once the harvest season sets in and the additional money hits the bank accounts. Also, investment demand is fine as far as foreign direct investment and government expenditure are concerned. Private capex is the only deterrent at this point of time. Also, corporate earnings in the June quarter were not as bad as previous five years.
Are valuations looking stretched for India?
Yes and no. Valuations would look stretched if you compare India to some of the regional peers, but compared to their own historical averages, they look quite okay.
Which sectors do you like in India?
We like consumer discretionaries, including consumer proxies, and within that pack we are more tilted to rural consumption. Next are the companies which are a play on potential industrial capex recovery. However, we need to avoid leveraged companies. Building materials are allied to them. We also like private sector banks. After the recent correction, we think there is a good stock selection opportunity in the IT services sector too.