Even as India used to trade at a significant premium compared to other emerging markets, the valuation premium has corrected after the recent underperformance, Anand Shah, CIO, BNP Paribas Mutual Fund, tells Puneet Wadhwa. Excerpts:
How do you expect the Indian equity markets to pan out in the near-to-medium term? What are the triggers for a likely upside/downside from the current levels?
We believe that in the longer term, the Indian growth story will benefit from favourable demographics. Large-scale investment in infrastructure will make sure that India remains one of the fastest growing economies in world. Thus, the Indian equity markets offer a superior investment opportunity for local and global investors, in the long term.
However, in the near-to-medium term, the market will remain highly volatile with risk-reward being slightly unfavourable. On a fundamental basis, the combination of high inflation, rising oil prices and rising interest rates does not augur well for any equity market. Going forward, we expect to see analyst downgrades for the GDP and near-term earnings of India Inc.
How does India compare with other emerging markets in terms of valuations?
Historically, India used to trade at a significant premium compared to other emerging markets. However, after the recent underperformance, India’s valuation premium relative to emerging markets has corrected.
On a one-year forward basis, India would be trading at around 15-16 times, while most of the other emerging markets will be trading in the range of 12-15 times.
Do you expect foreign institutional inflows into India improve? Why?
India saw one of the highest FII inflows, in absolute terms as well as in terms of the share of total flows into emerging markets, in CY2010. We do not expect the FII inflows in CY11 to be as high as CY2010, since the total flows are expected to be lesser and the fact that India’s share may not be as high.
Due to the rising inflation in developed markets, we believe that central bankers in these countries will be in a tightening mode vis-à-vis expansionary monetary stance of last year.
Thus, overall flows to emerging markets will be lesser. Secondly, due to rising oil prices, high inflation and slowing growth, India cannot command as high a market share as last year.
What is your expectation from the fourth quarter results of India Inc? Which sectors, according to you, are likely to do well? Have the markets already discounted the same?
We expect India Inc to continue delivering its 18-20 per cent earnings growth rate trend in this quarter as well. But, the key figures to watch out for will be margins. There will be an impact on the margins for companies due to rising raw material prices and wages.
We expect consumer led sectors that have the ability to pass on inflation to customers to do better than others. Sectors like auto, FMCG, cement and banking are expected to do well.
Are you fully invested at current levels? How have you churned your portfolio in the last six months? What is the strategy for the next few quarters?
We believe in long-term investing. The aim is to buy the best companies of the country run by superior management. We follow largely a buy and hold strategy barring situations where valuations are very high.
Over the next few quarters, we will continue to look to buy companies that have pricing power, strong balance sheets and superior free cash flows.
What is your take on the commodities space: oil, precious metals?
Global growth is expected to be seriously hurt by rising oil prices. Hence, we have a negative outlook on global commodities. As far as precious metals are concerned, they will continue to outperform other global commodities as long as interest rates remain low.
What is your advice to the retail investors in the current market conditions?
In the longer run, India offers a superior investment opportunity. India, over the next decade, will be one of the fastest growing economies due to favourable demographics, rising per capita income, consumption boom and rising infrastructure investments.
However, in the near-to-medium term, we expect a lot of volatility in equity markets, both locally and globally. We recommend investors take the SIP (systematic investment plan) route while investing in the equity markets.
