Volatility to rule the Indian market in near term: Manishi Raychaudhuri
Manishi Raychaudhuri, Asia Pacific equity strategist, BNP Paribas, expects volatility to rule the Indian market in the near term, and sees it underperforming its Asian peers, hurt by the bad loans of the banking sector. He is overweight India in BNP’s Asian model portfolio, but said the weight on India is considerably lower than peers China and South Korea. In an email interview, he said that he currently likes private sector retail lending banks, consumer discretionaries including autos, chemicals and gas transportation and select industrials in the Indian market. Edited excerpts.
How do you think Indian markets may fare for the rest of 2018?
In the near term, we expect the market volatility to continue. The near future possibly entails underperformance by the Indian market relative to Asia, on account of the uncertainties currently prevailing in the Indian market—with regard to non-performing assets in the banking sector and the consequent damage that the investment cycle may suffer. Asian markets are also likely to remain volatile for now, owing to the unfolding concerns about trade wars. India’s widening current account deficit and the sharp rise in bond yields—though the first is not a huge concern yet—are not helping matters either.
Over the longer term, however, we remain positive on the Indian market. We have a target of 37,500 for BSE Sensex by the end of 2018—implying 14-15% upside potential from present levels.
Where do the Indian markets stand in your Asia preference and why?
We are Overweight India in our Asian model portfolio, though our weight on India is considerably lower than that on China and Korea. Our Overweight on India is predicated on recovering GDP and IIP growth, resilient domestic consumption and relative ease of stock selection.
US Federal Reserve has hiked rates this week. How do you see US interest rates from here and what could be the impact on emerging markets?
We believe the Fed will hike rates four times in 2018—so thrice more this year—and once in 2019. The market’s expectation seems a little more benign. The usual impact on EM of monetary policy tightening in the developed economies is that of foreign fund flow retrenchment. We have seen that recently. In 2018 to date, the Asia-6 (six countries in Asia that declare their FII (foreign institutional investors) inflows / outflows regularly—on a daily basis) have seen outflows of $2.3 billion. India has seen inflows of $1.65 billion—sharply lower than in the same period last year. FII outflows have been more pronounced in the debt market.
When do you think earnings growth will make a strong comeback in India?
The October-December 2017 earnings season for India was slightly better than the previous 5-6 reporting seasons. Cuts in earnings estimates have also stabilized—except for PSU (public sector undertaking) banks and healthcare. We believe the January-March 2018 quarter should see further revival of earnings. Some sectors—particularly PSU banks and select private banks—may continue to disappoint, however.
Are Indian shares expensive? Why or why not?
On 12-month forward PE, India is trading at 17.8x, based on Bloomberg data—a premium of 36% to Asia ex Japan. India’s long-term average premium over the past 15 years is 31%. India, therefore, continues to trade at a premium, though the premium has shrunk considerably—by 11% in the last two months. The picture would appear similar when one considers price-to-book multiple. In the case of India, looking at individual stocks’ valuation vis-a-vis their earnings growth potential may be more meaningful.
What is your take on state-run banks, and the ongoing scam revelations? Do these tarnish Indian banks’ images for foreign investors?
The ongoing allegations regarding the Indian state-run banks have two effects—(i) that of depressing the entire banking sector’s valuations—and that’s the biggest sector in India in market cap terms, and (ii) potentially making the PSU bank managements unwilling to lend.
PSU banks still account for about 70% of the Indian banking industry in asset terms—and risk aversion on their part could have the effect of shrinking the capital available for industry and, hence, delaying the capex cycle further.
Which sectors do you like in India currently and why?
In India, we like private sector retail lending banks, consumer discretionaries including autos, chemicals, gas transportation companies and select industrials.
What is going to be the theme for the Indian markets for next one year?
Key investment themes in India would be consumption resilience, rural support and government investment. On the other hand, key variables to watch for would be banks’ NPA resolution, progress of the capex cycle and the unfolding domestic political scenario.
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