We are betting on three themes in India in 2019: Manishi Raychaudhuri, BNP Paribas
In 2019, EMs including Asia markets should outperform developed markets: Raychaudhuri.
- Not a fan of new era stocks, I prefer biz that have survived over 20-30 yrs: Vishal Khandelwal, SafalNiveshak
- Why Sandip Agarwal of Edelweiss prefers Infosys & Tech Mahindra to TCS
- Looking for winners? Consider these 4 bank stocks: N Jayakumar, Prime Securities
- 3 value buys for a 20% upside by this Diwali: Sanjiv Bhasin, IIFL Securities
Do you think 2019 is going to be a happy new year in terms of returns?
Compared to 2018, definitely! 2018 was a disastrous year in many respects and the driving factors predominately were the continuous rate hikes by the Fed which obviously squeezed out liquidity from emerging markets as a whole. As a consequence of the Fed policy stance, was the continuous appreciation of US dollar which is not a great scenario for emerging markets. We have possibly entered a period of global synchronised slowdown but at the same time it is not an economic collapse.
For example, compared to a 3% to 3.2% GDP growth in the United States in 2018, it will be about 2.3% to 2.4% this year but the important driver for emerging markets is the potential for US dollar to moderate. In 2019, the US dollar is likely to moderate against most of the developed market currencies and the emerging market currencies are likely to stay stable which is actually quite a favourable scenario for flows coming back into emerging markets.
That is likely to materialise possibly from the second quarter. It is likely to gather steam in the second half of the year. So the second half of the year in general for Asia is likely to be a lot better and that is why we have called it a tale of two halves.
In some sense, that has already played out in 2018. When we are talking about the S&P 500 or Shanghai already being in bear market territory, index pattern wise. Nifty and Brazil are the only markets which have actually outperformed. Do you see accentuated outperformance for emerging markets like us as opposed to US?
I would think that in 2019, emerging markets, particularly the Asian emerging markets should outperform the developed markets. Part of the reason is the whole argument of outflows coming back into this part of the world. Second, we must also understand that emerging market equities are a lot cheaper than they used to be. Over past 12-15 months, valuations have declined almost 20%.
In most of the Asian markets, price earnings or price to book multiples are at a discount to their long-term averages. In some cases, it is even at a one standard deviation discount, which is quite significant. India is not yet in that club but if you look at the north Asian markets, they are very cheap in comparison to the return on equity that they are likely to generate going forward.
Do you think election will be a boon or a bane for returns for investors this year?
It would obviously depend on the outcome which we do not know yet. But at least in the runup to the elections, there would be continuous news flow. Elections tend to be a volatile event in the context of India. We think that in the first half, volatility as a consequence of these factors is likely to continue. In the second half, it will possibly be more stable as the market comes to a conclusion about the kind of economic policies that the new government is likely to carry through.
If I were to do a scenario analysis, a high probable scenario is the new government coming back with an absolute majority or coming back with allies. One scenario that can shock the markets would be a third front or something less than 200 for the BJP. Do you think in the first two scenarios, India will be okay?
I think it would be okay. We have to watch out for the third possibility that you have painted. We have to see what the government says in terms of continuation of the existing economic policies because in that kind of a situation, the market would be apprehensive about the kind of economic policies that would be followed.
If you look at the present government’s policies, there were possibly broad trends or common threads you could talk about. The first was a thrust towards the formalisation of the economy and the second was an attempt at fiscal stabilisation or fiscal balancing.
This year it may not really play out because of the pressure of farm loan waivers etc. We may not have that fiscal balance this year but in general, these two were the broad policy thrusts of the present government. The market would be looking at whether these two trends continue going forward and whether divestment of public sector companies materialise.
Where would you say the outperformance and underperformance could be, assuming that the market manages to hold through and we manage to sail through and wade over the big event which is the elections? What should be the tactical sectoral approach?
Across Asia, we are recommending two or three notable themes and many of these percolate down to the Indian market as well.
First, domestic consumption across this region is likely to stay stable notwithstanding the negative news flow that we are seeing currently from China.
I am saying this because the global economic trend employment data is very robust. Wage growth in the developed markets are strong. Even in this part of the world, in southeast Asia, in India, in China disposable incomes are still growing at anywhere between 8-10% and in double digits in some parts. That is a very encouraging trend.
Domestic consumption, particularly consumer discretionaries in the Indian context includes the autos as well and that would be a sector to watch out for. That is one sector we are overweight on.
Second, in the context of India, and this is not just a 2019 story but over a much longer period, private sector banks are continuously gaining market share and they would continue to do so. Those private sector banks which are focussed on retail lending more than corporate lending are likely to be the gainers in this context.
Third, and this pertains more to India, even on the technology side we continue to be favourable towards the IT services companies. They had a massive tailwind in terms of the currency depreciation in 2018 which may not be so in 2019 but if American spending in general, the consumption environment and the business spending remains intact, that is another sector that could do well.
Why autos because there has been a marked slowdown there? In all likelihood, that will be reflected in earnings too and stocks have fallen quite a fair bit.
Yes, it would possibly in the short term.
So you think it is worth buying this decline?
I would rather say it would be prudent to buy this decline.