Fed may not raise interest rates now: Manishi Raychaudhuri, BNP Paribas
We have witnessed surge in emerging market flows with US Fed delaying the interest rate hike decision. We expect these flows into EMs are likely to sustain over the medium term.
Q: Do you think there is possibility of the US Federal Reserve increasing interest rates in June policy meeting?
A: The US Federal Reserve is unlikely to increase interest rates any time soon, and subsequent rate hike will depend on economic data points. Currently, US central bank is not anticipating any significant acceleration in economic growth. At BNP Paribas, we are forecasting that the US Fed will not increase interest rates in 2016. We have witnessed surge in emerging market flows with US Fed delaying the interest rate hike decision. We expect these flows into EMs are likely to sustain over the medium term.
Q: When do you expect a turnaround in corporate earnings growth?
A: I think the real turnaround in corporate earnings will happen from second half of fiscal year 2017. We believe this improvement in earnings will be led by increase in capex activities from the government and the foreign direct investment. We see some recovery in corporate earnings which is likely to increase to double digits of around 10-11% going forward. Some risks do remain in the banking sector, but a better monsoon coupled with the government initiative for the rural sector should see increase in rural consumption, which may boost corporate earnings. I think the worst of corporate earnings is behind us.
Q: The foreign institutional investors (FIIs) flows into India has been sluggish over last one year. When do you expect flows to resume strongly?
A: I think global investors are likely to get more enthused about the emerging market performance, as US dollar has shown signs of consolidation. In the medium to long term I expect flows into emerging markets to sustain. Historically, India has received about 30% of the flows of Asia ex-Japan universe, and given the economic scenario where GDP is growing and interest rates are declining I expect India to remain an important destination for foreign investors.
Q: Indian banking space is reeling under pressure of bad loans which is hurting market sentiments. When do you expect issues regarding NPAs getting resolved?
A: The potential non-performing assets (NPAs) in the banking system has already been recognized, in our view. I would say Indian banks are half way through to solving the issue of bad loans, and I think the worst is behind us. I would say India stands out in the emerging markets space when it comes to recognizing issues in the banking system, which is very encouraging.
Q: How are Indian markets positioned in the emerging market universe and what is your view on market valuations?
A: India is trading one-standard deviation higher to its long term average valuation premium in the Asia ex-Japan universe. India’s price to book valuation premium is currently around 60% in the Asia ex-Japan universe compared to historical average of about 40%, which looks expensive at this juncture. I would like to mention that global investors have already reduced India’s overweight position slightly over the past six months, however going forward I don’t think they will reduce further to a neutral stance, because of India’s promising fundamentals and good quality companies. We think India still stands out as a better alternative relative to its EM peers.