Failure of revival in earnings single-biggest risk for Indian markets: Manishi Raychaudhuri
Mumbai: The single biggest risk for the Indian market could arise from the failure of earnings estimates to revive, according to Manishi Raychaudhuri, Asia Pacific equity strategist, BNP Paribas. That said, India is less susceptible to global tensions than its Asian peers due to the largely domestic nature of the economy and relatively low trade linkage with economies that could be affected by protectionism, he added.
Edited excerpts from an e-mail interview:
Recently, Indian markets have reacted more than other major markets to global geopolitical tensions. Is the Indian market more susceptible to global tensions? Why?
India has underperformed the MSCI Asia ex Japan since late July—not because of global geopolitical tensions, but because the India earnings estimates continued to drift down during the last earnings season, while those for North Asian markets continued to move up. The best performer during this period was China—a market that provided a significant positive surprise during the result season. Geopolitical tensions did impact the performance of one market, South Korea, which has underperformed Asia and India. We believe India is less susceptible to global tensions than Asian peers due to the largely domestic nature of the Indian economy and relatively low trade linkage with economies that could be affected by protectionism.
What is your forecast for the Sensex/Nifty for calendar year 2017?
Our Sensex target by end of calendar year 2017 is 32,500.
Apart from geopolitical risks, what are the other risks for the Indian market?
We believe the single-biggest risk for the Indian market could arise from the failure of earnings estimates to revive. While consensus EPS estimates for north Asian markets have increased considerably since late 2016, India EPS estimates continue to drift down. We believe the economy needs to recover from the transitory demand compression caused by demonetisation and GST (goods and services tax) implementation for the earnings estimate trajectory to revive.
Where do Indian equity markets currently stand among Asian markets and why? Which are the other markets you like and why?
We are overweight on India in our Asian Model Portfolio, despite the market’s premium valuation and lack of earnings support. We have, however, reduced our overweight position considerably from Q1 2017. The policy environment in India has improved considerably in 2017 and, in our view, stock selection continues to be relatively easy vis-a-vis other Asian markets—leading us to remain overweight. We are also overweight on China, Korea and Indonesia. Growth and corporate earnings have stabilized in China, and the sectors in “New China”, which benefit from rapidly changing consumer preferences, are growing rapidly. Korea continues to benefit massively from global trade recovery, with rapid earnings estimate recovery across most sectors. Stable hard commodity prices and government’s infrastructure initiatives are supporting Indonesian equities and should continue to do so in the foreseeable future.
Which sectors are you upbeat about in the Indian market at this point of time and why?
In India, we like automobiles, private banks focused on retail lending, oil refining and marketing, and select consumer staples, particularly those likely to benefit from rural and semi-urban consumption recovery.
Which sectors are you avoiding in the Indian market and why?
We are avoiding metals and mining, telecommunications, and public sector banks in India. The telecom sector continues to suffer from the problems of an onerous competitive environment. PSU banks’ ongoing bad loan problems and their need to raise capital could continue to result in market share erosion. Both sectors have declining earnings estimate trajectories, which we believe may not reverse in the near term.
We saw issues between promoters and new management recently in the Tata group and at Infosys. What are your thoughts on the same? Does it tarnish Indian companies’ image in the eyes of global investors?
We don’t think investors are concerned about any broad-based deterioration in Indian corporate disclosure standards.
What do you think will be the theme for the Indian markets over next year?
We believe, over the next year, the key themes in India shall be rural and semi-urban consumption revival, continued formalization of the economy and gradual resolution of non-performing assets of banks.
Foreign institutional investors (FIIs) pulled out the most from Indian shares in August, since last November, while domestic institutional investors (DIIs) invested the most since November, and drove the market to record highs? Do you think this trend will continue and why?
FIIs sold (net) $1.82 billion of Indian equities in August and $573 million in the first few days of September—largely in response to lacklustre corporate earnings. We think FII selling may continue for a while because Indian earnings recovery seems to have been postponed to late 2017, and the market remains expensive relative to peers. However, we believe DIIs will continue to invest in the equity market in the absence of attractive alternative investment opportunities, and because Indian retail investors are on the whole under-invested in equities.
Are valuations in Indian markets stretched? When do you expect earnings to recover?
On consensus EPS (earnings per share) estimates, the Sensex currently trades at a 12-month forward PE of 17.6x—that’s a 35% premium to the valuation of Asia ex Japan, and slightly higher than the long-term average premium that India usually trades at. We believe the ongoing correction in India’s relative valuation could continue in the near term. We believe earnings recovery has been delayed due to the impact of demonetisation and re-stocking of consumer goods, among others, prior to GST (goods and services tax) implementation. Recent strong auto sales volumes ignite some hope of consumption recovery, but we believe, for a more broad-based earnings recovery, we may have to wait till the fourth quarter of FY18.
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