 "Global stocks vulnerable to Fed rate repricing: Toral Munshi")
Valuations are not overstretched but market is fully pricing in near-term growth, says Toral Munshi, director and head of India equity research at Credit Suisse Wealth Management. She tells Ashley Coutinho that India is one of the preferred markets among emerging ones because of improving macroeconomic environment. Edited excerpts:
What is your outlook on the markets?
Our three-month target for the Sensex is 28,300 indicating limited near-term upside after the recent rally. Our 12-month target is 30,300. Over the long term, we expect Indian equities to deliver a CAGR (compound annual growth rate) of 14-15 per cent, which is in line with the earnings growth. In our view, even though the index upsides appear moderate, there are significant bottom-up stock selection opportunities at every market level, which can help drive alpha in equity portfolios of clients.
We continue to see growth recovery and implementation of administrative and policy changes as the key drivers. The other key triggers for the Indian market are global liquidity flows and earnings momentum. The negative earnings momentum has now abated, and a positive EPS (earnings per share) upgrade cycle can be the key trigger for the next upmove on the market.
Where does India stand among other emerging markets?
Globally, we have an outperform view on emerging markets. Within that space, India is one of our preferred markets because of the improving macroeconomic environment. The macro momentum index — an in-house index that tracks bottom-up data — has been signalling an uptick over the past 14-15 months. In the near term, growth continues to be consumption-driven, but we also expect a more pronounced pick-up in public and private investment over the next 12-18 months. Also, it is seen that consumer discretionary growth moves into double digits whenever there is a pay commission hike. We expect two-wheeler and four-wheeler demand to start picking up significantly.
Are valuations stretched at this point?
Valuations are not overstretched but market is fully pricing in the near term growth. Investors can sometimes be misled by looking at historical valuation comparisons. If we look at the composition of Sensex earnings in 2008, materials and energy constituted 50 per cent of Sensex profits. These are sectors that don't command a PE (price-to-earnings) of more than 10. Today, the profit share of these sectors has shrunk to less than 12 per cent. Pharma, information technology, and consumption now constitute 42 per cent of the Sensex profits and these sectors are capable of commanding a PE of 20 or more. With the shift in profit mix, there is little surprise that Sensex aggregate valuation does not fall below 13-14x earnings and there is investor buying demand at those levels.
How do you view the global situation?
Global equities are approaching rich valuations and are vulnerable to Fed rate repricing. While yields have headed lower, global equities have moved higher, breaking the positive correlation between the two.
In the recent past, this has led to equity weakness. We, therefore, have a negative overall view on global equities, However, we expect select regions such as emerging markets, Switzerland and Australian equities to outperform.
Is there a danger of a global risk-off sentiment impacting India?
We are, of course, vulnerable to flows in the event of a global risk-off-related sell-off. But, this might provide a good opportunity for investors to buy India at more attractive valuations.
What have been the key takeaways from the June quarter earnings season?
The June quarter earnings season was a mixed bag, with reported numbers also seeing divergence due to accounting changes led by Ind-AS (Indian Accounting Standards) implementation. Operationally, we saw earnings beat in select metal, cement and utility names. Most of the consumer, energy and financial sector earnings were in line. However, the asset quality deterioration for the banks continued. Earnings downgrades were seen in telecom and select pharmaceutical names.
Which sectors are you not favouring currently?
We remain underweight on PSU (public sector unit) banks and telecom. PSU banks will continue to face growth and competitive challenges. Changes to the regulatory framework also constrain their growth recovery and the competitive landscape is turning more challenging due to technological changes as well as emergence of alternative channels of financial inclusion. Besides, they need to raise a huge amount of capital, which will keep supply elevated. We are cautious on telecom as cash flows generated by the industry would not benefit shareholders; rather, it will be channelised (via spectrum auctions) towards supporting an improvement of India’s fiscal situation, keeping companies’ balance sheets indebted.
