My advice to investors at this stage is to stay put: Mark Matthews

Also says, corporate earnings should grow at least by 20%, led by banks & commodity-related sectors

With the markets hitting all-time highs last week, Mark Matthews, head of research for Asia at the Zurich-headquartered Julius Baer Group, a multinational banking entity, tells Puneet Wadhwa that foreign investors will continue to buy in India, as they like the reform story. He says his feeling on India has always been that it is a buy and hold market. Edited excerpts:

The Indian benchmarks hit a new high last week. Where do we go from here?

The markets can go higher. Markets rarely trade in line with their long-term averages (LTA). When they are below the LTA, it’s because of a bad economy, political scenario in the country or global factors, and vice versa. 

I think we are in the latter situation as regards India. The Indian economy seems to be doing well — inflation is under check and corporate earnings growth is set to be quite robust this financial year. With the (central) government putting the right policies in place and winning the recent assembly elections, especially in Uttar Pradesh (UP), it looks set for another term.

Aren’t you concerned about the valuations?

These are a bit stretched but not very excessively above the LTA. I think they should be above the LTA because the economy is doing well and there is political stability, too.

The mid-cap and small-cap indices have outrun their large-cap peers. What is the road ahead?

It is more a function of fund flows. More than the FII (foreign institutional investor) flows, the domestic flows are assuming importance in India. Domestic investors will have a natural appetite for mid-cap and small-cap companies. Given this, the domestic fund flow will remain strong and will support the mid-cap and small-cap sectors.

How do you see FII flows over the next few quarters? 

I think the FIIs will continue to buy in India because they like the ‘reform story’ and feel the Bharatiya Janata Party (BJP) is more secure heading into the next general election. That apart, they don’t believe oil prices will go up significantly from here. That will be beneficial for the Indian economy. Thirdly, the emerging markets (EMs) are in a sweet spot. China has produced some very strong numbers. Exports of Taiwan and Singapore also look good. So, the EM space — given the combination of a relatively weak US dollar and high growth rates in Asia — puts the region in a sweet spot.

Are the markets ignoring the likely impact of GST implementation on the economy and, in turn, corporate earnings over the next few quarters? 

GST (goods and services tax) is one of many things which will take at least two years to have their effect felt. By then, a number of other reform measures would have been put in place. If, by then, the Modi-led government can swing the numbers in the Rajya Sabha in its favour, these reforms will accelerate. GST is very important for India; it will accelerate cross-state trade and investment. 

Are you happy with the government’s policy measures / reforms put in place thus far?

There have been numerous ‘reformers’ elected around the world in the last few years – from Shinzo Abe to Donald Trump, but Narendra Modi's reforms seem the most likely to really bear fruit, given the amount of work to be done in making India a better run country. The bankruptcy act, crop insurance act, real estate act, GST are each of very large significance. But, they also take a few years to get up and running. The assembly election outcome, especially in Uttar Pradesh (UP), augurs very well for the government's ability to secure a majority in the upper house next year. India should form a part of one’s long-term core portfolio, in my opinion.

The government has done a lot of good work, and it will not rest on its laurels going ahead. The important part now is execution. However, all this will take time to bear fruit.

What’s your advice to investors given this?

My advice is to stay put. Those who are already invested don’t need to do anything to the exposure they have. On the contrary, I recommend having some exposure to the Indian equities at this stage. My feeling on India has always been that it is a buy and hold market. It is not the market that I have ever tried to trade.

What are your estimates for corporate earnings growth in FY18? 

Corporate earnings should grow at least 20 per cent, largely led by banks and commodity-related sectors. The consumer sector also looks attractive. However, I see a lot of competition in this segment coming from foreign players. The larger and listed players will eventually benefit from the implementation of GST. Having said that, I feel the consumer sector’s earnings will remain a challenge given the recent government’s recent demonetisation move.