Japan’s financial firm Nomura has turned underweight on the Indian equity market as well as other emerging markets in 2010. However, it is overweight on developed markets like the US due to better valuations as compared to emerging markets. This is reverse of their stance in 2009 when Nomura was overweight on emerging markets, but underweight on developed markets. Nomura International’s managing director, Equity Research - Chief Global and European Strategist, Ian Scott says the change in stance is due to the higher valuation in terms of price-earnings ratio for the emerging markets. Though underweight for this year, he is optimistic about India in the medium term and likes sectors such as technology and healthcare. In his recent visit to India, he interacted with Virendra Verma. Excerpts from the interview:
What is your view on the developed and emerging equity markets?
In our 2010 outlook we are overweight on developed markets and underweight on emerging markets. The reason for this is that the valuation of developed markets is attractive as compared to emerging markets. The second reason is that there was record inflow of capital last year in global emerging markets. Historically, we have seen when there has been record inflows to emerging markets the returns in the next year are subdued. The earnings growth (around 24 per cent) in the developed markets will be at par with that of the emerging, but this growth has been discounted in the global emerging markets but that’s not the case with developed markets.
Within the emerging markets what is your view on the two fastest growing economies -India and China?
We are underweight on both the markets despite good economic growth. These markets already had a strong appreciation last year and their valuations in terms of the price-earnings ratio are relatively high. The fact is that the gap in terms of the valuation between the developed and emerging markets has to narrow down. The outlook for the next 6-12 months is that these economies have been fairly doing well, but the appreciation in stock prices may not happen as stock prices in these countries have already risen.
Does it mean that these markets will give negative returns this year?
No. These markets will not give negative returns, but what we think is that the returns will be lower than the returns from developed markets.
Can you quantify the returns?
I may not give you the exact returns for these two markets, but our view is that the returns from the developed markets will be around 17 percent and the global emerging market will give returns lower than this.
Over the medium term (five years) what is your view on the Indian equity market?
In the medium term, Indian markets have a lot of positive forces due to potential economic growth and superior corporate earnings. But in the short term, the returns may not be very good as there were inflows of around $20 billion since March 2009 in Indian equities from foreign investors and it is a very large inflow.
What are the sectors in India where Nomura is bullish?
We are bullish on technology and healthcare. These are the sectors where we think there is lot of growth potential.
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What about US President Barack Obama’s statement on outsourcing of jobs outside the country affecting the technology sector and its impact on Indian technology companies?
This may not affect the technology companies in India as the replacement cycle for technology is very short. So the user of the technology will always require to upgrade. Another reason why we are bullish is the huge free cash flow generated by these companies.
What about the sector where you are bearish in India?
We are bearish on interest rate sensitive sectors like banks and utilities. There are possibilities of monetary tightening which in turn could lead to rise in interest rates. This could affect these two sectors the most.
What is your view on the huge amount of money being raised from the primary market in India, especially from disinvestment?
All this depends on the state of the stock market. If the markets are good there will be huge paper (Initial Public Offers) and in this case India is no different. However, if the stock markets fall, then there will be slowdown in the fund raising from the primary market. This is not true about India but other emerging markets also.
There is likely to be large amount of equity issues from emerging markets and this would not lead to rise in earnings per share (EPS) in the same proportion as corporate profits. This is also the reason why we are underweight on emerging markets this year.
India’s central bank has increased the cash reserve ratio (CRR). Do you think that further tightening is required in India and other emerging markets?
Its right thing for RBI to increase the CRR and with inflation rising increase in interest rate would also happen. But, I don’t think that in the developed economies like US such thing will happen.
