EMs look attractive in 2020 from a valuation standpoint: Satish Betadpur

Satish Betadpur says polarisation in Indian equities will continue until the investment climate changes and companies get back their pricing power

The emerging markets look attractive in 2020 from a valuation standpoint, says Satish Betadpur, managing director, head of investments – India, State Street Global Advisors. In an interview with Business Standard, on the sidelines of the CFA Society India’s 10th India Investment Conference, he says polarisation in Indian equities will continue until the investment climate changes and companies get back their pricing power. Edited excerpts: 

Do you think emerging market (EM) investing could present a rewarding theme in 2020? 

The emerging markets are trading at attractive valuations are expected to see a pick-up in earnings growth. A stable dollar may provide support as well. Emerging markets haven’t done well for a while and part of the reason is China, which is a big part of the index. The country has seen excess capacity build-up and the trade war does not help. It’s one of the large markets that saw negative returns in the past decade. This year, the expectation is that Chinese earnings growth will pick up. Overall, the US-China trade wars, elections in the US, Brexit, and the tension in the Middle East are cues to watch out for. The US Iran standoff, though, seems temporary. Both sides have pulled back and we believe that the tensions may not escalate much from here on.  

How is India placed in the EM pack?

Investors are generally positive on emerging markets and India will get a portion of the money that is buying into EM indices. Dedicated money from quarter-by-quarter NAV-driven money managers may wait for visible signs of an uptick. At this point, we don’t have a clear sign of an uptick although the bottom seems to have been reached. If you believe that the bottom is reached, then this may be a good time to select stocks with good fundamentals, robust balance sheets and economic moats. There are opportunities for long-term players, which is why private transactions are picking up, and private equity players are picking up sizeable stakes in companies.

What is your take on the current economic slowdown?  

We are expecting India to do better this year, and expect the banking crisis to work its way through. We are going through a cathartic phase but the problem of non-performing assets had to be fixed. The bankruptcy law is a great exercise to get the money back. As money from the big NPAs comes back to the banking system, loan growth may pick up. Right now, we are not seeing loan growth because nobody is confident of borrowing for business. A clean-up of NBFCs may happen much more slowly. The accommodative interest rates will hopefully help kickstart the housing segment, especially if housing loan rates drop to around 7.5 per cent levels. The RBI has been cutting rates but there has been no follow through by banks. 

Considering we are in a major slowdown, a revival in the banking and housing sectors will benefit other sectors as well. 

Any expectations from the government in the upcoming Budget...

Cutting corporate tax rates was a good move. We are now reading about a personal income tax cut of some kind. It should have happened earlier; hopefully, it will come through this time. It was a mistake last time to increase surcharge on the super-rich because it gives a signal to investors that this is a tax-and-spend government. Not too many people are in this bracket. So, the government may not get too much money from this. Only focusing on a deficit target may not be the most prudent thing to do right now. Yes, deficits need to be managed. When you have deficits with high growth, you know eventually that the debt will be paid off. When you have deficits with no growth, that’s when you risk a downgrade from the rating agencies. Between a corporate and personal income tax cut at some point, the economy will shoot up. The timing is unknown – it never is known for any country.

Do you expect polarisation in Indian equities to continue?

Our index is held up by a few stocks. Broad-based index movement of stocks will only happen once the economy stabilises, and you see business investments and pricing power come back. None of that is happening right now. When I look at various companies, by and large, I don’t really find any pricing power and I don’t see sales growth accelerating. Order books of infrastructure companies need to see an improvement. 

US equities have enjoyed more than a decade-long bull run. Is the rally sustainable? 

Valuations in the US are stretched and a lot depends on the pick-up in corporate earnings growth. The consumer sector is holding up, earnings in tech and healthcare are holding up as well. Tech companies’ valuations are going up because oof the change in the way internet, mobile, and cloud are consumed. All the new technologies have become productivity enhancing tools. Valuations are high but investors in these stocks believe that earnings will catch up. The monetary policy has been supportive in the US and this year, being an election year, the fiscal policy may be accommodative as well. Some people are worrying about this being a late cycle but then we have been worrying about a late cycle since 2016.