Risk of earnings downgrades later this year: Herald Van Der Linde

We expect good performance from EM equities in 2017, says Herald Van Der Linde

Hong Kong–based Herald Van Der Linde, head of Asia equity strategy at HSBC, the London-based global financial services group, talks to Puneet Wadhwa on market outlook. Edited excerpts:
 
What are the likely triggers and risks for the (global and Indian) markets from here on?
 
A key trigger is the dollar. As its strength starts to wane, something we expect later in 2017, we should see EMs (emerging markets) and India outperform. Indeed, we believe, for these markets to perform, we don’t need to see a reversal in the dollar trend but that the trend of a stronger dollar starts to wane. In our view, we are very close to or already are at this position. So, we expect good performance from EM equities in 2017.

 

Does Donald Trump’s presidency have the potential to disrupt global financial markets?
 
There is a lot of information and signing of new orders under any new administration. The Trump administration is not new in this regard. It is always better to step back from the day-to-day noise and look at what policies are actually signed and implemented. We do believe that, as we saw in Japan and India, after a new president comes in that expectations often meet some ‘reality check’.
 
This was also so after the Modi win in India. Initially, there was euphoria. After that, a reality check. Such a check is also likely in the US. This would imply that the high expectations for growth in the US would diminish and this would make EMs relatively attractive. India would be a good pick in such an environment, as the risk to Asian equities lies in trade flows with the US and India is much less exposed to this than, say, China.

 
Will the EMs continue to remain attractive?
 
Barring any geopolitical events or a significant deterioration in trade flows, we think fund flows will be supportive to EM, Asia and Indian equities. This is because we believe the markets will eventually re-price the dollar story. After Trump and the Republicans won, funds flowed out of EMs into the US, on high growth expectations in the US. As these expectations are recalibrated lower, we expect some of these flows to reverse, which suggests a weaker dollar and a better fund flow environment for EM equities in general.
 
Your interpretation of India’s Budget proposals?

 
The 2017-18 Budget strikes a balance between fiscal prudence and growth. The Budget is, therefore, essentially a continuation of the policy direction set out last year, when the finance minister placed the country on a fiscal consolidation path but still provided funds for agriculture and rural India, and raised public infrastructure spending.
 
Given global economic volatility, we think the government was wise to emphasise macro stability in this year’s Budget, rather than raise spending in pursuit of uncertain amounts of growth. It has set a target to lower the fiscal deficit from 3.5 per cent of gross domestic product last year to 3.2 per cent (slightly higher than the three per cent consensus expectation). At the same time, it is raising expenditure to boost farmers’ income, rural infrastructure, affordable housing, transport infrastructure and consumption (the latter via cuts in personal tax). These measures were widely expected but are nonetheless positive for Indian equities.

 
How much importance are the markets and foreign investors likely to give to the outcome of the ongoing state assembly elections?
 
Elections are always of importance, as they might indicate the government’s ability to push structural reform. However, structural reform comes over a longer period in time and one election will not change the scope. So, we should also not overstate this importance of state elections in India.
 
Are the markets in for a shock if the ruling party were to lose Uttar Pradesh?
 
 Not really. At the moment, it appears a neck-to-neck race and the markets are aware the ruling party could lose.

 
 Your estimates for corporate earrings for FY18 and FY19?
 
We think earnings will see a rebound after the demonetisation. We are awaiting evidence of this in the next months as companies release their earnings. The consensus is looking for nearly 20 per cent earnings per share growth in India in the next 12 months. But, this looks too high to us and there remains a risk of earnings downgrades later this year.