The Indian market has bounced quite a long way but residual issues need to be resolved. India's valuations are also less compelling compared to markets such as Russia and China, says Philip Poole, global head of macro and investment strategy, HSBC Global Asset Management, in an interview with Samie Modak. Edited excerpts:
Globally, investors are pinning hopes on more stimulus packages. What are your expectations?
It seems the US Federal Reserve (Fed) officials are clearly concerned that the economy is not growing robustly and unemployment is sticky. I think there is a good chance of a stimulus coming, probably this month or certainly next month. There are a number of things the Fed can do. They could reinforce the message that bond yields will remain very low for a very long term. There could well be purchases of additional direct treasury or mortgage-backed securities.
However, these measures, although much anticipated by the markets, are unlikely to have any significant impact on the real economy. We already have an extremely loose monetary policy. The reality is that the transmission mechanism to the real economy is effectively broken. Investors want to see more of it as they believe it directly helps asset prices. It probably would in the short term but in the longer term, each successive wave of unconventional monetary easing is having less and less effect.
How do you see the equity markets?
Over the past 10 years, the fixed income markets have outperformed. But, on the basis of current valuations, bond markets look overbought and expensive. So, we think there is long-term value in the equity markets, relative to bonds. In the short term, we have this phenomenon that most people call ‘risk-on and risk-off’. We have periods where 'risk assets' see sell-off in a kind of synchronised way and then periods when they tend to bounce back in a synchronised way. Short term prospects of the equity market will be dominated by this risk-on and risk-off type of behaviour.
Another element is how the economic data comes through, relative to expectations. We have seen the data underperforming expectations this year. So, what’s been happening is that the psychology of the market is also being managed down. It is possible that we see positive surprises, not because the data turns out to be any better but since expectations in the sense have fallen. So, it is possible that we see data starting to come through more in line with expectations. If that were to happen, it would be supportive of risk assets, including the equity markets.
Which markets do you like at the moment?
The most critical component for generating long-term returns is the price at which you buy those markets. It’s a very obvious statement but I feel it’s not focused on enough. Emerging market equities, because of the better underlying fundamentals, should perform well. Also, stocks and sectors associated with demand in the emerging world should do well. In terms of valuations, the market cheapest to us and with our biggest overweight is Russia, where the valuation is significantly below its five-year average and the economy has held pretty well. We also think China looks very cheap, considering that year-to-date they are down seven per cent in dollar terms, which makes the entry point interesting.
The Indian market?
India has been one of the better performing markets this year. It’s still trading at a forward price to earnings multiple which is below its five-year average. From a foreign investor’s point of view, the rupee looks undervalued relative to the dollar. So, it continues to be an attractive entry point for the market overall. I think it’s important to focus on the correct sectors. So, sectors that we like include discretionary consumer stocks but not consumer staples. It also includes select financials, the materials sector, industrials associated with domestic consumption, as we think GDP (growth) is bottoming. More defensive sectors like telecom, consumer staples or utilities look expensive relatively to the other sectors we prefer.
We have seen FII (foreign institutional investor) inflows of about $12 billion this year. What explains such healthy inflows? Will these continue at this pace?
The outflows from India are also very big, one of the biggest in the emerging markets. So, to an extent, what has gone out has come back in. The weakness of the rupee has added to the idea that the equity market was trading at a valuation that was attractive. Investors have been putting money in India irrespective of the problems it’s been facing. I wouldn’t expect the pace of the inflows to continue at this level. The market has bounced quite a long way but there are residual issues that need to be resolved and valuations have become less compelling. Also, the relative valuation of markets like China and Russia are more attractive.
What returns do you expect from the Indian markets in the next one year?
It will depend on risk appetite and on what happens to US data, what the ECB (European Central Bank) and Fed do. These are key factors for India, even more than what the government does in the short term. India can continue to perform well if we remain in a period where markets are bouncing. But, equally, if markets sell off, then India could be even more vulnerable. We don’t have specific targets but it’s pretty clear with bond markets offering eight per cent after tax, it’s a pretty compelling story, given the volatility in the global markets.