Indian markets are at a record high. What is driving this rally? Is there more steam to this rally, or will the party be over soon?
The interesting part about the current rally is that it is being driven by DIIs (domestic institutional investors) rather than FIIs (foreign institutional investors)—in fact, since the last all-time high of the Sensex in March 2015, DIIs have put in nearly 2.5x of what has been put by FIIs. We also have the best macroeconomic conditions seen in India for a long time.
All macro parameters are very robust—the current account deficit, the fiscal deficit, inflation, oil prices, etc., are all in the green zone. While one-off knee-jerk reactions can be expected, the markets will continue to perform strongly. Going forward, the macro factors are going to remain robust and will further drive the market. In parallel, I do see FIIs coming back strongly with the global economy and EMs (emerging markets) also on an upswing
Are Indian markets expensive at this point? Why or why not?
In the early stage of any economic recovery, the markets look expensive as the future growth and recovery is being factored into prices. If we look at the market-to-GDP ratio, India is still around 85%, much lower than US and China—this number was 147% for India during the peaks of 2007. In my view, a ratio of ~120% of market cap to GDP is more reflective of the Indian economy and in the long-run, we can expect the market to touch those levels
When and by how much do you see earnings recovery happening for Indian companies?
We have already started seeing offshoots of growth in the corporate sector—earnings have started improving gradually in certain pockets. However, an across-the-board improvement will take around 12-18 months.
Where does India stand in your EM/Asia preference? Why?
India has been one of the top performing economies in Asia. We have the highest growth along with a very stable political situation and a reform-minded government. However, what sets India truly apart from other fast growing Asian markets is its size—we are only behind China. Combined with the unique economic and political stability fostered by the democratic environment in the country, India is possibly the best long-term bet in terms of stability and sustainability.
Will US President Donald Trump’s tax cut plans impact emerging markets in a big way? How much impact do you see on Indian information technology (IT) and pharmaceutical sectors from the visa restrictions and protectionist policies?
I think India is fairly insulated from most global issues—even when the Trans-Pacific Partnership collapsed, we hardly saw any impact on India. I doubt we would have seen too much of an impact even if it had gone through. While there might be some impact from the visa issues (on IT companies), I also see a lot of collateral positives with a lot of these jobs coming back to India.
Are geopolitical risks being ignored by global investors?
I think it is an important factor but only up to a certain extent. In the short run, geopolitical risks do queer the pitch for any economy.
What are the key risks to this rally in emerging markets, particularly India?
I think the big risk from a global perspective for India is oil prices—oil price can have a significant impact on our current account deficit and inflation.
Internally, we have always been reliant on monsoon, and a good monsoon can do wonders for the economy; similarly, a bad monsoon can drag down the growth a few notches.
Another critical milestone would be the implementation of GST (goods and services tax) and its aftermath—the government has done well to keep interests of all stakeholders in mind. It is now important that the execution happens smoothly.
Which sectors in India are you overweight and underweight, and why?
With the major themes playing out around monsoon, the rural economy and GST, we expect discretionary consumption-driven sectors like automobiles and consumer durables to do well.
Historically, BFSI (banking, financial services and insurance) sector has also done well when the economy has done well.