 "We expect growth to start showing up in overall numbers: Nandkumar Surti")
Uncertainty over regulatory policies at the domestic level and a host of global issues have kept the gains in the market under check. Nandkumar Surti, MD & CEO, JP Morgan Asset Management India tells Vishal Chhabria that at the current levels, the markets are not richly valued given the fact that we are at the beginning of cyclical upturn that will see earnings growth and return ratios moving to a higher trajectory in the medium-term. Edited excerpts:
The monsoon session of parliament has been stormy in light of the scam and Lalitgate as well as opposition parties’ disagreement on GST and Land Bill issues. How do you see these and potential impact for markets?
We believe a stormy monsoon session of parliament is largely built into market expectations. So, the expectation of any meaningful legislative business is rather low. We therefore do not expect a large negative impact on the market.
What is the downside risk to markets if the key bills are not passed in the foreseeable future?
We do not expect significant downside to the market due to this issue.
The rain gods have not been kind enough this year. How will it reflect on the economy as a whole?
While there were big concerns on monsoon following the initial IMD estimates; the rainfall seems to be catching up. A clearer picture should be available only by the end of August. The area under cultivation which is significantly higher, compared to last year is a comforting factor at the moment. We believe the government is well prepared to deal with any deficiency in monsoon from food inflation perspective.
It is almost 15 months since the new government came to power but there's hardly any pick-up in the economy. What is your reading?
While the economy might not have picked up on an overall basis, we clearly see a few bright spots such as commercial vehicles and cars, and expect to see a recovery in other areas, too, over a period of time.
Many participants in the market expect earnings to rebound in the second half of FY16. Are you in the same boat and why?
Yes, we expect the growth to start showing up in aggregate numbers, on the back of demand pick-up during the festival season and the favourable low base of last year.
Recently, some big names like TCS, Tech Mahindra and Sun Pharma have cautioned investors about their earnings outlook. Does that worry you and are there other potential candidates that could follow suit?
While some of the issues cited were company specific but a few were industry linked and might affect other companies in the sector as well.
The markets are at 17 times the FY16 estimated earnings. Aren't they richly valued? How do you see the trend in the next four or five months?
We do not believe the market is richly valued. We are at the beginning of a cyclical upturn which will see earnings growth and return ratios moving to a higher trajectory in the medium term. It is often misleading to focus on near term valuation during such an upturn.
Which stocks or themes do you like in this market and expect to play out well over the next one year?
We like industrials, private sector banks, cement and automobiles. These sectors are levered to growth acceleration.
Is it worth taking some risk by betting on commodities, public sector banks, infrastructure or realty companies, many of which are trading at multi-month lows?
At this point, we are not overweight on these sectors.
Global events seem to have subsided for the time being but are far from over. How do you see things unfolding in the coming months, and the possible impact for India?
While the US Federal Reserve is preparing for its first rate rise since 2006, the European Central Bank (ECB) and the Bank of Japan are still in the middle of their quantitative easing and this is likely to pursue well into 2016. This is likely to keep global liquidity ample in the medium term.
Also, we believe that the rising yield from a low level reflects improvement in US economic fundamentals. This is positive for emerging markets like India. What also works for India is successful stabilisation measures by the central bank, a decline in inflation and a faster than expected narrowing of the trade and current account deficits.
China is a bigger threat in terms of demand shock. What are you factoring in?
First, China needs to break out of the low cost model and move into higher value-added manufacturing and services. Second, China is now engaging in the ‘one belt, one road’ initiative, essentially infrastructure projects like those beyond China. That could well pick up some of the slack in their economy. Finally, the Chinese authorities should continue to adopt a loose monetary policy to support growth.
We believe that investments to India will come on merit, given the fact that the economy is recovering slowly and capital investments have started picking up.
JP Morgan has quite a few funds that allow investors to invest in global markets. How are they doing?
JPMorgan in India has funds that allow investors to get exposure to US, Europe, North Asia, South Asia and other emerging markets. These funds have broadly outperformed their benchmarks. Although flows into these funds have been anaemic given the strong momentum in domestic equities, we believe having exposure to these funds can reduce the overall volatility of the portfolio while maintaining the potential of giving decent returns.
What is your call on global markets and the one or two you expect to outperform in the next one year?
In developed markets, we are positive on both the US and Europe. The ECB’s monetary easing measures seem to be working in bringing growth back to the euro zone. A combination of a lower euro, declining corporate lending rates, improving credit conditions, uplift of business and consumer sentiment have all contributed to a domestic-driven recovery in the euro zone.
The underlying trend in the US economy is accelerating. Household deleveraging has made much progress and borrowing recently looked up, supporting consumption. The corporate sector is in strong financial shape to invest for the future and US banks are both able and willing to lend.
In emerging markets (EMs), despite the many concerns today, including the gradual slowing of Chinese growth, weakness among commodity producers and the potential impact of higher US interest rates on EM flows, the EM earnings still have strong long-term growth potential. Valuations are still attractive and as global growth picks up, we see greater return potential.
Disclaimer: The opinions/ views expressed herein are the independent views
The monsoon session of parliament has been stormy in light of the scam and Lalitgate as well as opposition parties’ disagreement on GST and Land Bill issues. How do you see these and potential impact for markets?
We believe a stormy monsoon session of parliament is largely built into market expectations. So, the expectation of any meaningful legislative business is rather low. We therefore do not expect a large negative impact on the market.
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What is the downside risk to markets if the key bills are not passed in the foreseeable future?
We do not expect significant downside to the market due to this issue.
The rain gods have not been kind enough this year. How will it reflect on the economy as a whole?
While there were big concerns on monsoon following the initial IMD estimates; the rainfall seems to be catching up. A clearer picture should be available only by the end of August. The area under cultivation which is significantly higher, compared to last year is a comforting factor at the moment. We believe the government is well prepared to deal with any deficiency in monsoon from food inflation perspective.
It is almost 15 months since the new government came to power but there's hardly any pick-up in the economy. What is your reading?
While the economy might not have picked up on an overall basis, we clearly see a few bright spots such as commercial vehicles and cars, and expect to see a recovery in other areas, too, over a period of time.
Many participants in the market expect earnings to rebound in the second half of FY16. Are you in the same boat and why?
Yes, we expect the growth to start showing up in aggregate numbers, on the back of demand pick-up during the festival season and the favourable low base of last year.
Recently, some big names like TCS, Tech Mahindra and Sun Pharma have cautioned investors about their earnings outlook. Does that worry you and are there other potential candidates that could follow suit?
While some of the issues cited were company specific but a few were industry linked and might affect other companies in the sector as well.
The markets are at 17 times the FY16 estimated earnings. Aren't they richly valued? How do you see the trend in the next four or five months?
We do not believe the market is richly valued. We are at the beginning of a cyclical upturn which will see earnings growth and return ratios moving to a higher trajectory in the medium term. It is often misleading to focus on near term valuation during such an upturn.
Which stocks or themes do you like in this market and expect to play out well over the next one year?
We like industrials, private sector banks, cement and automobiles. These sectors are levered to growth acceleration.
Is it worth taking some risk by betting on commodities, public sector banks, infrastructure or realty companies, many of which are trading at multi-month lows?
At this point, we are not overweight on these sectors.
Global events seem to have subsided for the time being but are far from over. How do you see things unfolding in the coming months, and the possible impact for India?
While the US Federal Reserve is preparing for its first rate rise since 2006, the European Central Bank (ECB) and the Bank of Japan are still in the middle of their quantitative easing and this is likely to pursue well into 2016. This is likely to keep global liquidity ample in the medium term.
Also, we believe that the rising yield from a low level reflects improvement in US economic fundamentals. This is positive for emerging markets like India. What also works for India is successful stabilisation measures by the central bank, a decline in inflation and a faster than expected narrowing of the trade and current account deficits.
China is a bigger threat in terms of demand shock. What are you factoring in?
First, China needs to break out of the low cost model and move into higher value-added manufacturing and services. Second, China is now engaging in the ‘one belt, one road’ initiative, essentially infrastructure projects like those beyond China. That could well pick up some of the slack in their economy. Finally, the Chinese authorities should continue to adopt a loose monetary policy to support growth.
We believe that investments to India will come on merit, given the fact that the economy is recovering slowly and capital investments have started picking up.
JP Morgan has quite a few funds that allow investors to invest in global markets. How are they doing?
JPMorgan in India has funds that allow investors to get exposure to US, Europe, North Asia, South Asia and other emerging markets. These funds have broadly outperformed their benchmarks. Although flows into these funds have been anaemic given the strong momentum in domestic equities, we believe having exposure to these funds can reduce the overall volatility of the portfolio while maintaining the potential of giving decent returns.
What is your call on global markets and the one or two you expect to outperform in the next one year?
In developed markets, we are positive on both the US and Europe. The ECB’s monetary easing measures seem to be working in bringing growth back to the euro zone. A combination of a lower euro, declining corporate lending rates, improving credit conditions, uplift of business and consumer sentiment have all contributed to a domestic-driven recovery in the euro zone.
The underlying trend in the US economy is accelerating. Household deleveraging has made much progress and borrowing recently looked up, supporting consumption. The corporate sector is in strong financial shape to invest for the future and US banks are both able and willing to lend.
In emerging markets (EMs), despite the many concerns today, including the gradual slowing of Chinese growth, weakness among commodity producers and the potential impact of higher US interest rates on EM flows, the EM earnings still have strong long-term growth potential. Valuations are still attractive and as global growth picks up, we see greater return potential.
Disclaimer: The opinions/ views expressed herein are the independent views