India is back with a bang on FIIs mind: Sumit Jain, ASK Investment Managers

Nifty 12-month forward PE is around 23 per cent below peak. Indian equities should find support from robust earnings outlook owing to strength in the domestic economy.

The going has been good for the Indian stock markets in the last few weeks. SUMIT JAIN, deputy chief investment officer at ASK Investment Managers, in conversation with Puneet Wadhwa, says that the Indian equities should find support from robust earnings outlook owing to strength in the domestic economy. Edited excerpts:

Is the worst of the inflation and rate hike cycle getting over globally, or are the markets being too optimistic?

There has been a broad-based softening of inflation from the recent peak levels – in India and globally. The drivers of high inflation have started to turn. Globally, commodities prices, including energy, have come off. The supply chain situation has fast normalised, agri prices are off from their highs. Going forward, we may see moderation in services inflation as well. While the possibility of rate cuts may still be away, absence of rate cut itself should help prevent further de-rating in markets and prices should grow in line with earnings growth expectations.

Will the Indian equities be able to outperform their peers?

After a sharp outperformance, India underperformed the emerging markets (EMs) initially at the start of the year. That underperformance has reduced meaningfully, and India is back with a bang in the minds of international investors. Timely correction in the Indian markets, coupled with continued earnings growth by India Inc and a rally in EMs led to drop in valuation premium. This should lead to reduced headwind versus EMs – supportive of foreign flows as well.

How long will domestic institutions (DIIs) continue to hold the markets in the absence of a meaningful FII participation?

Nifty 12-month forward PE is around 23 per cent below peak and now in line with the historical average. Indian equities should find support from robust earnings outlook owing to strength in the domestic economy (financials and consumption segments will be key beneficiaries), even as global growth suffers (implying a weak growth outlook for Indian IT companies). Given the still under allocation to equities by Indians, domestic flows in equities should continue.

Are Indian markets expensive valuations versus peers a concern?

India's premium versus its peers is in response to the stable fiscal and policy environment that India presents. Also, given India's superior demographic profile and the policy focus towards inclusive growth, the growth visibility that India's offers is for a much longer period of time. While topical factors can play a role for a short period of time, the long period earnings outlook remains superior. Indian markets ought to command a premium versus its peers.

What has been your investment strategy in the last 6 – 12 months?

We have a higher focus on the superiority of India's growth versus global growth. Our investments are aligned towards businesses that benefit from this. Areas that should do well include beneficiaries of higher manufacturing in India, supply chain dislocation like chemicals etc.  Consumer businesses should benefit due to premiumisation trends and also fall in commodity prices leading to a positive impact on margins. There has been trimming of earnings expectations, especially in IT businesses; but given strength in banks' asset quality, uptick in loan growth, strength in net interest margins (NIMs), strength in urban demand despite rural weakness – India Inc's earnings outlook looks alright.

DISCLAIMER: The interviewee is the Deputy CIO of ASK Investment Managers Limited. The views and opinions expressed here are personal.