'As a consequence of the valuation correction, one can selectively pick stocks that will be significant alpha generators in the medium term.'
Heightened geopolitical tensions between India and Pakistan evoked a knee-jerk reaction from the markets last week. Hong Kong-based Manishi Raychaudhuri, bottom, left, Asian equity strategist at BNP Paribas, tells Puneet Wadhwa that any correction in Indian equities is an opportunity for investors to put in money for the long term. Excerpts:
What are the implications for the markets and fund flows into India, given the recent surgical strikes?
Beyond a possible short-term dip, we don’t expect significant negative impact on flows into Indian equities.
How do you see the markets playing out over the next three-six months, given global developments?
We think the emerging markets (EMs) and Asia, in the medium term, will possibly do better than the developed markets (DMs). There are a couple of reasons behind this.
First, the DMs are far more expensive right now compared to the EMs. This is partly due to the sharp rally in the DMs since the past few years. Second, we are also seeing earnings recovery in EMs, including Asia.
However, in the near term, equity markets - both DMs and EMs - could see some correction after the recent sharp rally. There can be some geopolitical risks that are getting concentrated over the fourth quarter, which may have a bearing on the sentiment.
What are your December-end targets for the Sensex and the Nifty?
For the Sensex, we have a target of 29,000 points. This implies that Indian markets could either correct from present levels, or remain around the current levels for some time.
The latter scenario is that of a time correction, which the Indian markets are already going through, compared to other Asian markets.
Having said that, the risks investors face are not India-specific but are outside Indian shores. The most recent geopolitical tension has added to that. Potential slowdown in the European Union or the political change of guard in the US and its implications on the economic policies are questions investors increasingly ask now.
Is life tough for fund managers who are looking for a good bargain, given the rich valuations and the 2016 rally?
In the near term, say about one quarter, they might have to tighten their belt and brace for a correction. However, over the medium-to-long term, we don’t really see much risk in the EM universe. EMs are likely to outperform, and India continues to be a bright spot.
Which regions in Asia are you overweight on?
We are overweight China, India, South Korea and Thailand.
Can you elaborate on your India-related stance?
Fundamentally, India appears relatively a lot better than many other EMs. In India, we are seeing a gradual recovery in growth. At the same time, interest rates have been declining. We anticipate a steep decline in inflation in the near term, which leaves room for the Reserve Bank of India (RBI) to cut rates – if not this year, definitely in early next year.
So a combination of increasing growth and declining rates is a rare combination in EMs. Economists refer to this as the ‘Goldilocks scenario’.
That apart, we think earnings estimates in India, as in the rest of Asia, are beginning to revive. This economic and earnings recovery will be aided by a revival in the monsoon and the Seventh Pay Commission payout, which should support consumption in the semi-urban, tier-I and tier-II cities. Even the political and legislative decision-making situation has improved remarkably.
What about valuations?
India trades at a premium to its EM peers. But, this premium has declined. India’s valuation premium peaked around March–April last year, when it was nearly two standard deviations above the long-term average.
It is now between half and one standard deviation. In relation to Asia (ex-Japan), India does appear expensive but not in relation to its own history. Any correction in Indian equities is an opportunity for investors to put in money for the long term.
Which sectors do you still find value in the Indian context?
There are four silos that we are concentrating on. First is consumption. This implies both consumer discretionary and consumer staples but with a slightly higher tilt towards semi-urban consumption. Second, we also think at some stage, industrial recovery will lead to alpha generation.
So, industrial companies, particularly those with low leverage, are the ones to focus on. We also like cement. The third is private sector banks, especially those with a retail focus. The fourth is the information technology services space.
As a consequence of the valuation correction, one can selectively pick stocks that will be significant alpha generators in the medium term.
Photograph: PTI Photo