We're overweight India in Asian equity portfolio: Manishi Raychaudhuri

The new Covid strain has dented sentiment across global financial markets over the past few sessions. MANISHI RAYCHAUDHURI, head of Asia-Pacific Equity Research, BNP Paribas, tells Puneet Wadhwa in an interview that though Indian valuations appear stretched, in an environment of rapid economic recovery and earnings estimate upgrades, investors may be over the medium term willing to back a market with earnings visibility and not focus only on valuations. Excerpts:

The new Covid variant has wreaked havoc across global financial markets. How do you see 2022 shape up for equities as an asset class? 

Asian equities should generate higher single-digit or low double-digit returns in 2022, pretty much in line with consensus earnings growth forecasts. We forecast developed markets (DM) to outperform emerging markets (EM) this year, though, within EMs, Asia should outperform Latin America. The key risks in 2022 are the possible ‘overtightening’ of monetary policy by central banks and the spread of new Covid variants, which may force governments to restart lockdowns or restrict mobility.

The Indian markets underwent a sharp correction recently. Is the worst behind us now?

The Indian market is still trading at a 60 per cent premium, compared with the Asian average in terms of one-year forward P/E (price-to-earnings) multiple, and at 100 per cent premium on one-year forward price-to-book (P/B) multiple. The current valuation premia are significantly higher than long-term averages, even after India’s recent correction. 

The likely catalysts for India’s outperformance are continued upgrades to earnings estimates and the emergence of concrete signs of a capex cycle — a revival in bank loan growth, for instance. Moderation in commodity prices, particularly oil, can be another catalyst, supporting the rupee, and hence boosting sentiment.

What has been your strategy for Indian equities in the Asian/EM basket?

We are currently overweight on India in our Asian equity model portfolio. Even though Indian valuations appear stretched relative to peers, in an environment of rapid economic recovery and earnings estimate upgrades, investors may be over the medium-term willing to back a market with earnings visibility and not focus only on valuations. In India, we are currently overweight on financials, information technology (IT) services, telecommunication, and energy (primarily oil exploration). We also have some exposure to market leaders in auto and consumer staples.

Given how Paytm listed, do you think retail investors would be wary of investing in new-age companies?

Both retail and institutional investors shall continue to be interested in the digital economy and tech mega-trends. These companies are getting listed in India and Southeast Asia at a time when the Chinese internet platforms are suffering from regulatory uncertainties. Going forward, investors shall pay closer attention to valuations and the likely competitive pressure that each business segment of the upcoming new-age companies faces. 

Are we looking at a couple of quarters of earnings downgrades?

The commodity user sectors — consumer staples and discretionary, in particular — have faced margin pressure and may continue to do so over the next couple of quarters. In these sectors, investors would have to be careful to pick only the companies with significant pricing power and which can pass on the input cost increases to customers. 

Mineral producers and commodity manufacturers continue to see earnings estimate upgrades and the momentum can continue for now. Overall, we have a positive outlook on Indian earnings estimates. The large sectors — financials and IT — continue to see positive upgrade momentum; the former due to likely interest margin expansion and lower asset quality concerns and the latter due to large deal wins from DMs.