BackSWFs’ exposure cuts due to oil prices may cause outflows from India: Neelkanth Mishra
Domestic earnings would actually see lower cuts in 2016 than 2015, says Credit Suisse's Mishra
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With oil prices trading at multi-year lows, outflow from sovereign wealth funds of oil-dependent nations will continue, says Neelkanth Mishra, managing director and India equity strategist at Credit Suisse. This could not only halt around $8-10 billion in inflows into India but also lead to a risk of outflows from the domestic market. That said, India is being seen as an asset class in itself which could help keep inflows steady, says Mishra.
Edited excerpts from an interview:
You’ve been speaking about lower oil prices hurting sovereign wealth funds. How severe could be the impact on their emerging market investments, specifically India?
At these oil prices, the West Asian economies are struggling to manage their budget. It could be that oil prices may have fallen now, but the accountant (of sovereign wealth funds) may take that bill to the governing body in March. Like last year, oil prices started falling in October-November, but we kept seeing inflows until February. Then suddenly, from late March onwards, we started seeing flood of outflows. So, we don’t know when it will happen. Around $8-10 billion of inflows will stop coming to India, and on top of that there will be outflows.
This trend will be offset by other trends of India becoming an asset by itself. In the last six months, I must have met some pension funds, family offices, funds of funds. They are realizing that India is very idiosyncratic, which means it grows by its own design. So, as India emerges as an asset class, you are seeing more India funds getting inflows.
How do you see Indian markets faring in 2016?
I don’t expect the P/E (price-earnings) multiples to really come down. It is safe to assume that if global P/E multiples remain where they are, India’s P/E multiples, in my view, will at least track that or, if not, improve from here. In terms of earnings, all the growth we expected at the beginning of the year (for BSE 100 firms) has been cut. In 2016, we expect that the cuts will be a lot more moderate. MSCI India 12-month forward earnings are right now projecting a 19% growth. We are thinking it will settle at around 13-14% growth.
The domestic earnings would actually see lower cuts in 2016 than 2015. We may even see upgrades in some sectors such as the consumption sector. As this happens, you will see broader earnings cuts (the index earnings cuts) not being 15-20% but more like 5-6%.
What will drive the growth in 2016?
Even now, it is important to understand that the economy is reviving. The broad-based hard indicators are showing that growth is picking up. I think growth will potentially accelerate in the new year. In the first half, economic growth may be more of base effect, but in the second-half when the pay commission comes in, I think you will see very strong acceleration. As that happens, you will see confidence in earnings growth.
What sectors will be driving the growth in the next year?
The sectors driving most of the growth will be private banks, NBFCs (non-banking financial companies) and IT services. These are sector overweights. Even if they grow at 14-15%, they contribute a lot to the index.
What are your views on the new government’s performance so far? Do you think the global investors are losing their patience with the slow pace of reforms?
You shouldn’t have had high expectations in the first place. So, we wrote in March 2014 that even if the government does very well, given the scale of the country, and the high level at which state governments work, it will take 6-8 years for it to show on the ground. I think there is a lot of good work happening, but it is not going to impact earnings in the next 3-6 months or so.
It is also unwise to expect the central government to drive a lot of change because the role of the central government in the economy has shrunk dramatically in the last 25 years due to privatization.
Which sectors are you overweight on and which would you avoid?
We are overweight on staples and discretionary, and underweight on materials, industrials and telecom.
Certain large companies in infra and metals sector are struggling to repay debts due to delays to big investment projects, leading to bad loans. What is the way ahead?
The situation will get better but some steps have to be taken, and those steps have to be sector-specific. The steps that you need to take, for instance, for stressed loans from the power generation sector, need to be very different from the steps needed to improve the fundamentals of a metal company. On the metals side, given my outlook which is quite negative on profitability, banks have to write down loans. Maybe, there has to be change of control, a complete shake-up.
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