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With the economy back in recovery mode and the current account deficit (CAD) narrowing, India is the best structural story in the emerging markets (EM), said BNP Paribas in its Asia Strategy report. The France-based investment bank is overweight on Korea, India, Taiwan, Philippines and Thailand in its Asia (ex-Japan) model portfolio.
“India, despite the recent outperformance and consequent valuation premium, still seems the best structural story in EM, with recovering growth and a declining CAD,” Manishi Raychaudhuri, managing director, Asian equity strategist and head of research - India at BNP Paribas, said in the report.
BNP Paribas says India’s valuation at 16 times (one-year forward price-to-earnings ratio) are “reasonable”.
“We maintain our overweight stance on India due to reasonable valuations, strong earnings growth potential, lower trade balance risk and probability of only a small impact of deficient monsoon on inflation and agri growth. Downside risk is inaction on part of the Modi government to trigger key economic reforms, which the market is expecting,” the report adds.
India’s benchmark indices have gained 26 per cent this year on the back of foreign institutional investor investment of nearly $14 billion.
BNP Paribas believes the pace of foreign flows into emerging markets will continue for another six to seven months. It says safer markets like South Korea are relatively better-placed than the rest of Asia, as the US Federal Reserve begins to tighten monetary policy.
Since 2013, the seven Asian countries, including India, Indonesia and South Korea, have received overseas investment of whopping $67 billion. India has seen one of the highest flows in Asia, so far this year.
BNP Paribas, which has BPCL and L&T in its Asia model portfolio, says the Fed rate increase will hurt India but it will also benefit from declining oil and coal prices.
“The Indian imperative is to kick-start the investment cycle, simplify labour laws (as of now localised efforts are in progress in certain states) and implement fiscal discipline (somewhat achieved in the last budget, but a lot more needs to be done),” Raychaudhuri states in the report.
