 "India will be attractive if valuation premium narrows: Manishi Raychaudhuri")
The recent stocks rally is due to a combination of global and local factors, says Manishi Raychaudhuri, Asia equity strategist at BNP Paribas, the Paris-based multinational financial services group. In an interview with Purva Chitnis and Samie Modak, he says the lack of investment opportunities in the US and Europe is driving foreign investors to emerging markets. Edited excerpts:
Indian markets have rallied sharply since March. Why?
The rally is not India-specific and has happened across emerging markets (EMs). Even the stressed markets in Latin America have recovered. This is a direct consequence of the revival of flows into EMs. Global central banks, led by the US Federal Reserve, turning a lot more dovish have been a key trigger.
Is India still the most preferred destination for foreign investors?
Investors in EMs and Asia (excluding Japan) have been overweight on India. In the past few months, they've slightly reduced this, for two reasons -- corporate earnings disappointment over almost five quarters and India becoming relatively expensive in relation to Asia ex-Japan. The valuation premium had shot up to about 60 per cent. Traditionally, it has been 30 per cent and currently it is down to 40 per cent.
Could this premium dip further?
India would appear more attractive if it did. For instance, if it comes down to the long- term average of 30 per cent, that could be a reason for an increased degree of enthusiasm from investors.
Are earnings still unrealistically high?
If I look at the consensus earnings estimates for this financial year, they seem to indicate growth of 16-17 per cent. Clearly, on the higher side. We are believers of early-teen kind of growth. This means the consensus earnings forecast has to come down by three to four percentage points.
BNP Paribas has a year-end Sensex target of 29,000. What are the key assumptions?
From the present level, one can rule out re-rating of the Indian market. But, if we have 10-12 per cent earnings growth, then at the same value of valuations, the market can move up 10-12 per cent, in line.
Crude oil prices have rebounded sharply. At what level do they become a threat for the market?
We are far away from oil prices becoming a stress point for India. We don't think they'd rise sharply from here. They would remain in the present range. So, compared to previous years, the Indian current account and inflation would be very much under control. From the external side of it, we have no concerns whatsoever, right now.
We have seen sharp foreign inflows since March. Are these hot flows or sticky money?
The kind of flows we have seen in Asia seem a little more fundamentally driven. There are lack of investment options in the global financial markets. So, North America and even European equities have drawn a lot of inflows over the past one and a half to two years. But, things are looking relatively less rosy in those parts of the world, partly because of the high valuations US equities are trading at. Lack of alternative investment avenues are enticing investors to look at EMs.
Any peculiar investment trend in India you have picked up?
The Indian market was one of the worst performers in 2015. Almost all sectors had an earnings decline. In the past quarter, we saw a revival in two sectors. First, information technology services - earnings estimates have revived among large frontline companies. Second, in some of the private sector banks, particularly those that are retail-focused (meaning, on individuals). These are two instances of departure that we receive right now. It is yet to become a broad-based revival.
Indian markets have rallied sharply since March. Why?
The rally is not India-specific and has happened across emerging markets (EMs). Even the stressed markets in Latin America have recovered. This is a direct consequence of the revival of flows into EMs. Global central banks, led by the US Federal Reserve, turning a lot more dovish have been a key trigger.
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Some local factors have also come into play. First, we are seeing a clear impetus in government-sponsored infrastructure projects. Second, while rural distress is still quite apparent as a consequence to two bad monsoons, the recent forecast indicates rain this year will be better than the long-period average. It would mean a significant revival in the agriculture sector from a low base. So, a combination of global and local factors has led to this rally in India.
Is India still the most preferred destination for foreign investors?
Investors in EMs and Asia (excluding Japan) have been overweight on India. In the past few months, they've slightly reduced this, for two reasons -- corporate earnings disappointment over almost five quarters and India becoming relatively expensive in relation to Asia ex-Japan. The valuation premium had shot up to about 60 per cent. Traditionally, it has been 30 per cent and currently it is down to 40 per cent.
Could this premium dip further?
India would appear more attractive if it did. For instance, if it comes down to the long- term average of 30 per cent, that could be a reason for an increased degree of enthusiasm from investors.
Are earnings still unrealistically high?
If I look at the consensus earnings estimates for this financial year, they seem to indicate growth of 16-17 per cent. Clearly, on the higher side. We are believers of early-teen kind of growth. This means the consensus earnings forecast has to come down by three to four percentage points.
BNP Paribas has a year-end Sensex target of 29,000. What are the key assumptions?
From the present level, one can rule out re-rating of the Indian market. But, if we have 10-12 per cent earnings growth, then at the same value of valuations, the market can move up 10-12 per cent, in line.
Crude oil prices have rebounded sharply. At what level do they become a threat for the market?
We are far away from oil prices becoming a stress point for India. We don't think they'd rise sharply from here. They would remain in the present range. So, compared to previous years, the Indian current account and inflation would be very much under control. From the external side of it, we have no concerns whatsoever, right now.
We have seen sharp foreign inflows since March. Are these hot flows or sticky money?
The kind of flows we have seen in Asia seem a little more fundamentally driven. There are lack of investment options in the global financial markets. So, North America and even European equities have drawn a lot of inflows over the past one and a half to two years. But, things are looking relatively less rosy in those parts of the world, partly because of the high valuations US equities are trading at. Lack of alternative investment avenues are enticing investors to look at EMs.
Any peculiar investment trend in India you have picked up?
The Indian market was one of the worst performers in 2015. Almost all sectors had an earnings decline. In the past quarter, we saw a revival in two sectors. First, information technology services - earnings estimates have revived among large frontline companies. Second, in some of the private sector banks, particularly those that are retail-focused (meaning, on individuals). These are two instances of departure that we receive right now. It is yet to become a broad-based revival.