Indian markets have touched all-time highs recently. Do you expect the rally to sustain?
India, relative to its own historical average and to Asia ex-Japan, appears slightly overvalued or about one standard deviation higher. This would have been okay if the earnings estimates had been growing or at least been stable. But unfortunately, they have not. The macro has been favourable, the political environment has improved and therefore there is euphoria about reforms continuing going forward, but for a sustainable rally we need improvement in earnings
Will FY18 be a year where we finally see double-digit earnings growth?
In the past three-four years, India has had single-digit earnings growth. Even in fiscal 2017, it would be in single digits -not more than 6-7%. In the fiscal 2018, it could be in double digits but just about so at 12-13%.The consensus earnings estimates are another cause of worry because they are in the range of 17-18%, which means they need to come down a little more.
Between now and year end, how much scope for returns do you see in markets?
We have a target of 30,300 for the Sensex by the end of 2017. The Sensex is close to 29,500 or so already, which means there is very little headroom or upside left for the remaining part of the year. Unless the earnings estimates recover significantly, there is no reason for us to revise that target upwards. It means that to provide investors a significant return, the market has to correct from here.
Allocation of financial savings into equities by domestic retail investors is now expand ing again gradually. It is still low -hardly about 5% or so -but it has the potential to increase a lot more because the yields from many of the alternative asset classes -be it fixed income or real estate -have gone down drastically. In the long term, the prospect for domestic money coming in is a lot stronger than we have historically seen.
Foreigners have been pouring money into India in a big way after recent state polls...
In 2016, FPI money was in the range of $5-6 billion. In one quarter this year, we have got $4.3 billion till date and it will increase going forward. In the medium to long term, we are believers in the sustainability of flows into EMs, and therefore even for India, the foreign portfolio inflows at least in 2017 should be much stronger than in 2016.
Where do you see the rupee by 2017-end?
Our global economics group has a target of 68 (per US dollar) for the rupee by end of this year. The rupee has appreciated to somewhere around 65 currently. Historically, the RBI has never prescribed a target for the rupee, but they want to avoid any sharp fluctuations. Unless the rupee appreciates much further, to about 63 or so, they may not really intervene in a big way.
What does the UP win mean for the government in the 2019 general election?
I don't think too many people are concerned about the 2019 elections right now, as it is two years away. But going by the recent trend, the ruling party seems to be going from strength to strength.
Will EMs overall see a better year as well?
The valuation gap between developed markets and EMs have now gone to such a level where possibly the EMs are looking a little more attractive. We have seen inflation come back to certain pockets of EMs, which had been in deflation for quite some time.We have also seen a revival of global trade.This is what economists call the `Good Trump impact. What we have not seen is possibly the impact of the so-called `Bad Trump' -the trade restrictions and punitive import duties That is potentially one risk for the emerging market universe. For the time being, this so-called good Trump impact will take centre stage in driving equity valuations.
You have been positive on Indian private banks but they have run up quite sharply.Nifty Bank is up 33% in the past year. What is your outlook now?
For some of the private sector banks, we still do see significant momentum over the longer term. With a six-to-nine-month time lag, there should be a significant uptick in credit growth and private banks will be the biggest beneficiaries because they are the ones with headroom to lend. The valuations may appear steep, which possibly might lead to some relative or time correction in these private-sector banks, but it should not be a significant concern for a long-term investor.
Metals have also seen a runaway rally. Have their fundamentals have improved?
Metals are not something we are constructive about. To some extent, fundamentals have improved because metal prices have improved, but their fundamentals are not as strong as some of the other commodities. Most of the metal companies are highly leveraged, not just in India but also in South Asia. Many of them also have US dollar debt, which we are concerned about. They have had a massive rally, but we don't think the valuation leaves much room for more upside
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