India’s prospects look better than most emerging markets: Mixo Das of Nomura Holdings
Mixo Das, South-East Asia equity strategist at Nomura Holdings Inc. says steps the government is taking to address NPAs in the banking system are in the right direction
Additional tangible catalysts such as the roll-out of the goods and services tax (GST) could drive the Indian markets higher, and investors will overlook any weakness in macro numbers for some time on the hope that the tax reform is a structural positive for the economy, Mixo Das, South-East Asia equity strategist at Nomura Holdings Inc., said in an interview.
Steps the government is taking to address non-performing assets (NPAs) in the banking system are in the right direction, Das said. Edited excerpts:
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The Indian markets are at a record high. Where do you see them headed? Is there space to scale more highs?
We still see some more upside in the Indian market. India is still an overweight market for us. We upgraded it in December last year, right after demonetisation, because we saw it as a good entry point. For a market which still offers the best growth and reforms story in the region, you essentially get it at a valuation premium which is probably at 20% to the region currently, compared with the peak in 2016, which was about 50% plus.
You are getting it at an attractive valuation and the story is not probably any worse, rather it is marginally better, where much of the politics has unfolded in a favourable manner after setbacks a couple of years ago.
Even in terms of reforms, India is moving in the right direction.
The good thing about markets in India is that there are tangible catalysts coming up, which will drive a re-rating in the market and I am primarily referring to GST implementation at this point.
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Investors will overlook any weakness in macro numbers for some time on the hope that it is a structural positive for the economy and the nature in which business is done in the economy.
We will continue to see news flow on the banking sector, especially NPA resolution—and it probably is not as good as it could have been, but it is a step in the right direction.
We could see bank consolidation happening among PSUs (public sector units). This will provide positive news flow for the market, and it will drive more investors’ attention. All this is happening at a time when we are seeing tremendous interest in equity investing from local investors—mutual funds have been deploying more and more money into the domestic market.
At last count, this number was almost $100 billion. This is a natural consequence of moderation in inflation, and the fact that other assets of traditional investments such as fixed deposits, government bonds and even gold look relatively less attractive when compared with stocks.
So, have investors been overlooking concerns like slowing gross domestic product (GDP) growth as per the latest numbers, as well as the fact that corporate earnings have not come back. Or have these concerns already been factored in?
Yes, these have been factored in. Firstly, the Q1 figure of 6.1% is probably a bit understated and we’ve been seeing some lagged effects of demonetisation in the GDP print, but the underlying pace of growth is probably better than that.
For sure, growth has not accelerated the way it should have, but it is not bad, and it remains on a fairly strong footing.
For corporate earnings, we will probably see about 15% EPS (earnings per share) growth this year, which, apart from Korea, is probably the best in the region, and it assumes some further downgrades to earnings numbers.
This is a very normal thing across the region and globally, where earnings numbers always begin very optimistically and then get revised lower, depending on how the outcome turns out to be.
In India’s specific case, we do agree that the past two years have been bad, but this is not just unique to India, but true across the region, where earnings were going on a gradual upward trajectory from 2011 to 2014, and then from 2016 onward, we are seeing a downturn.
A large part of this is commodity-related, and this is true for India, too. You look at India as a commodity importer, but when you look at India’s equity markets, there is a lot of commodity exposure.
Then the banking system problems came up at around the same time, which also caused a lot of downgrades to earnings. The issue of the severe downgrades we saw during the past two years was probably unique in some sense, and this is true for India and the region, where the kind of earning underperformance during the last two years will probably not repeat this year. We will see about 15% growth this year.
What about valuations?
India trades at about 35-40% premium to this region. At the peak in 2015, this was upward of 50%—from that perspective, there is still some room.
Valuations are high not just in India, but everywhere. The US is at an all-time record high—are they justified?
I don’t think so.
Valuations over many multiple years will come down everywhere, and it won’t happen this year from the looks of it, and it is the same for India.
If you compare current valuations in India to the past, they look elevated, and they will look elevated for some time—the way we think about this is in terms of relative valuations, where India trades at about 35% premium to the region. I can foresee this going up to 45% to the region before we can start worrying.
Does this mean there are better picks in this region, considering that India trades at a premium? Big picture, where do you place India when compared with emerging markets?
India is a better market than any of the Asean (Association of South-East Asian Nations) countries at this point. We will do more work on the Asean region in 2018 where the outlook will start to look better. But for the rest of this year, India is still the better market to be in.
If you look at Asia ex-Japan, Korea is the market we like the most, followed by India, and then it is the Philippines and Thailand. This gives you a picture of where we are in terms of allocation.
India’s prospects look better than most emerging markets (EMs).
China gives it good competition, because there are really very strong changes underway in China, which will change the outlook for that market over the next 12 months or so.
If you look at what is happening in Brazil, that market looks very dodgy, and if you look at what is happening in Russia, it is going through its own troubles.
Many of these emerging markets outside Asia are very commodity-dependent, and our outlook on commodity prices is not very rosy.
When we think about EMs, we break them down into three broad categories.
First group is commodity related EMs—the Brazils, the Russias and the likes of Indonesia.
Second is those countries that are primarily driven by domestic demand, including India and Turkey—the markets of these countries are much more reflective of domestic demand.
The third group is those set of countries which are plugged into the manufacturing segment—these are the traders and you have Korea, Taiwan, Malaysia and Thailand.
Between these three categories, the commodity exporters did really well from 2016 all the way to early 2017.
From middle of 2016 to Q2 of 2017, the exporters have also done really well.
Now is the time to look at the domestic stories. We’ve been pushing this to investors from the first quarter of this year.
Among the domestic stories, India stands out as not just the best growth story in Asia, but also the best reforms story.
We have a quantitative index tracking reform progress in all EMs—looking at these numbers, we find that India is the best reforms story in all of EMs.
And where does Asean stand?
The way we convert these reforms to numbers, it is a relative ranking. Singapore is at a much higher level when you look at Asean—it is out of the normal range.
Among other countries, Thailand and Malaysia are also relatively higher, compared with the group that India falls in.
India’s neighbourhood contains countries like the Philippines, Vietnam and Indonesia—these four countries are probably the most credible reforms stories that we have in Asia, and these are the four countries that we need to look at more closely in order to try and find the next growth generators.
If you look at the reforms scorecard, Vietnam has been gradually inching higher, which is fine; the Philippines did really well from 2010 to 2014,and it has been falling for the past two years; Indonesia did really well from 2004 to 2008, and it has slipped a bit, but most recent trends show it is coming back, and this is consistent about the way you would think about reforms in Indonesia.
Again, when you look at these four, India is the one that is improving the fastest.
I will also point out that India’s reform scores were not always this good—from 2007 to 2014, it had been slipping, and it was only after the Narendra Modi-led administration (took charge that) there has been a turnaround.
What is the impact of the Qatar crisis on India and Asean?
Qatar is not a big crude exporter, but it is a big exporter of LNG (liquefied natural gas), and if anything is impacted, it will be that.
Qatar’s LNG is primarily exported to Japan, Korea, China, India, and I am not sure if any of these countries will be aligned with any kind of US sanctions on Qatar.
So, I am not sure if there will be a very big supply disruption even in the LNG space, because of the Qatar-Saudi tensions.
There are other aspects to it—if the situation escalates into a more open conflict, then it will impact crude.
There are areas where the Saudis may want to pressurize Japan to buy less of Qatar LNG—for Japan, almost 40% of their crude imports come from Saudi Arabia.
The Saudis do have some leverage, and the dynamics are very complicated.
We should also keep in mind that Qatar has a very large investment authority, which owns about $100 billion in equities globally, and these are mostly in the US and Europe.
I don’t see this having any impact on India and this region.