 "Slowing China could impact global markets: Manish Gunwani")
The weakening dollar has improved the prospects of global flows into emerging markets, including India, says Manish Gunwani, deputy chief investment officer (equity) at ICICI Prudential AMC. He tells Ashley Coutinho that Indian equities are now in the middle zone with regard to valuations. Edited excerpts:
The equity market has seen an uptick since February this year. What is your outlook for the year ahead?
We can look at this from three angles - macro, valuation and flows. From a macro perspective, the domestic macro looks reasonably attractive, with the current account deficit (CAD) and inflation levels in control. Globally, growth is tepid which is also hindering the pace of India's growth revival. As far as valuations go, the market is now in the middle zone with regard to earnings and book value. And, with the dollar weakening, the prospects of global flows into emerging markets in general and India in particular have improved. So, overall, we are quite positive on equities from a two- or three-year time-frame.
It all depends on the context of the Fed action. If the rate hikes happen due to a pick-up in growth and inflation continues to remain benign, then it should not be such a problem. We believe the US interest rates are only one part of the overall picture. If we look back at the past 3-5 years, emerging markets have not delivered any meaningful returns in dollar terms in spite of US interest rates remaining low. So, the correlation between emerging markets and US interest rates is not that straight forward.
Have the markets celebrated the prospects of a good monsoon too early?
The early indicators of monsoon are healthy and some part of the run-up in the market is due to this. A weak monsoon could definitely have some impact on the country's economy. As far as inflation goes, the headwinds and tailwinds seem to be in balance. The positive side includes the prospects of a good monsoon and low capacity utilisation in a lot of sectors. The headwinds are the pullback in commodity prices, especially oil in the past few months and sticky inflation expectations.
What risks does China pose?
It does seem that China is undergoing a transformation from an investment-driven economy to a consumption-driven one. The key risk is that the slowdown in investment spending could impact the macro stability given the high levels of debt in the economy. This could show up in the currency market, which can then have a pronounced impact on the global market. However, in the past few months, things seem to have been quite stable and the weakening of the dollar has been positive.
What is your assessment of the past quarter's earnings?
Given the muted expectations, the results were quite good. Clearly, consumer-facing sectors benefited from the deflationary trend in input prices, especially those linked to crude oil. Also, several companies demonstrated the ability to control costs much better than expected in an environment where top line growth is scarce. The positive surprises came from sectors such as auto, consumer goods, cement and industrials.
It’s largely the domestic institutional players that have been supporting the market this year. Do you expect this trend to continue?
From a structural perspective we do believe that Indian households are under-invested in equities and the asset class remains the most attractive from a two-three year time-frame. We do expect domestic investors to gradually shift their savings share from physical assets to financial assets including equities.
Which sectors are you bullish and bearish on?
We believe the Indian economy is in the midst of a gradual recovery and combined with better valuations, domestic focussed sectors including financials, utilities and logistics look more attractive.
What is your advice to equity investors?
Investors should gradually increase their allocation to equities. They can look at balanced as well as dynamic asset allocation funds that seek to increase allocation to equities when the markets are cheap and book profits when the markets are rising, thereby reducing volatility and providing reasonable returns.
The equity market has seen an uptick since February this year. What is your outlook for the year ahead?
We can look at this from three angles - macro, valuation and flows. From a macro perspective, the domestic macro looks reasonably attractive, with the current account deficit (CAD) and inflation levels in control. Globally, growth is tepid which is also hindering the pace of India's growth revival. As far as valuations go, the market is now in the middle zone with regard to earnings and book value. And, with the dollar weakening, the prospects of global flows into emerging markets in general and India in particular have improved. So, overall, we are quite positive on equities from a two- or three-year time-frame.
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Will emerging markets such as India be in trouble if the Fed goes aggressive on rate hikes?
It all depends on the context of the Fed action. If the rate hikes happen due to a pick-up in growth and inflation continues to remain benign, then it should not be such a problem. We believe the US interest rates are only one part of the overall picture. If we look back at the past 3-5 years, emerging markets have not delivered any meaningful returns in dollar terms in spite of US interest rates remaining low. So, the correlation between emerging markets and US interest rates is not that straight forward.
Have the markets celebrated the prospects of a good monsoon too early?
The early indicators of monsoon are healthy and some part of the run-up in the market is due to this. A weak monsoon could definitely have some impact on the country's economy. As far as inflation goes, the headwinds and tailwinds seem to be in balance. The positive side includes the prospects of a good monsoon and low capacity utilisation in a lot of sectors. The headwinds are the pullback in commodity prices, especially oil in the past few months and sticky inflation expectations.
What risks does China pose?
It does seem that China is undergoing a transformation from an investment-driven economy to a consumption-driven one. The key risk is that the slowdown in investment spending could impact the macro stability given the high levels of debt in the economy. This could show up in the currency market, which can then have a pronounced impact on the global market. However, in the past few months, things seem to have been quite stable and the weakening of the dollar has been positive.
What is your assessment of the past quarter's earnings?
Given the muted expectations, the results were quite good. Clearly, consumer-facing sectors benefited from the deflationary trend in input prices, especially those linked to crude oil. Also, several companies demonstrated the ability to control costs much better than expected in an environment where top line growth is scarce. The positive surprises came from sectors such as auto, consumer goods, cement and industrials.
It’s largely the domestic institutional players that have been supporting the market this year. Do you expect this trend to continue?
From a structural perspective we do believe that Indian households are under-invested in equities and the asset class remains the most attractive from a two-three year time-frame. We do expect domestic investors to gradually shift their savings share from physical assets to financial assets including equities.
Which sectors are you bullish and bearish on?
We believe the Indian economy is in the midst of a gradual recovery and combined with better valuations, domestic focussed sectors including financials, utilities and logistics look more attractive.
What is your advice to equity investors?
Investors should gradually increase their allocation to equities. They can look at balanced as well as dynamic asset allocation funds that seek to increase allocation to equities when the markets are cheap and book profits when the markets are rising, thereby reducing volatility and providing reasonable returns.