 "Benjamin Yeo")
After a sharp run-up, the markets seem to be consolidating their gains. Singapore–based Benjamin Yeo, managing director and chief investment officer, Asia & Middle East, for Barclays, the London-headquartered banking and financial services company, says he’s more inclined to take profits and trim some positions at the margin, especially in sectors and names that have done well. He speaks to Puneet Wadhwa on the outlook here and abroad. Edited excerpts:
Do you think the markets look overheated from a near-term perspective?
In the near term, barring a marked deterioration in the macro economic fundamentals, the valuation of global bonds continue to look rich across most, if not all, categories – whether government bonds or corporate credits.
On the other hand, global equity at the aggregate level seems at best fair; however, there are marked differences between regions, blocs and markets. Even within the developed bloc, valuation of US equity might look stretched in the near term although still not anywhere near the peak levels seen historically. Valuation in European equities, on the other hand, is relatively more attractive, albeit a slower earnings trajectory for now. All in all, for global equity to reach or near the historically peak levels, we need to see a broadening of equity performance on a global basis.
What are your sector preferences, then?
We believe the economy’s next uptick, especially for the developed bloc, is likely to be driven by an impending crank-up in the corporate capital expenditure cycle. On this basis, we would prefer capital over consumer sectors. We continue to advise our clients to be appropriately positioned in sectors such as industrials, technology, oil and banking, clear beneficiaries of a capital spending boom. In contrast, we think the consumer sector, especially consumer discretionary, has performed reasonably well in the past five years and might be vulnerable to a correction arising out sector rotation, based on the recovery scenario we have delineated. Selectively, we would still be positioned in certain health care names where valuations permit but would avoid the more defensive sectors like telecoms and utilities.
However, any recommended allocations are on a relative under- to over-weighting bases within a fully diversifiable portfolio – be it across assets, regions, countries, sectors or industries.
Should global investors be cautious on India, given the run-up seen in calendar year 2014? Are asset prices cheap enough that the likely return exceeds the potential risk?
The run-up in the performance – ahead of the election since September 2013 and even year to date – of India’s equity is remarkably impressive. So far, the election results seem to have justified the performance on both absolute and relative bases. Credit has to be given to the public relations machinery and feat of the Modi administration in generating positive sentiment before, during and after the election. That has invariably raised investor expectations.
However, beyond the heightened euphoria, it’s going to be business as usual, and investors will be poring over policy structure, details and strategies in the coming months. It is not uncommon, then, to see softer equity markets as due to investors who’d ‘bought on rumour and will look to sell on fact’. Thus, while most good news seems fully discounted, investors appear rather short-sighted in discounting any potential risks on the horizon.
Thus, we would be cautiously optimistic on the medium-term outlook for India’s economy and equity markets. In fact, we would trudge along rather carefully and look for confirmatory signs that the Indian economy will be effectively restructured with sustainable policies and processes brought about by Modi economics. As valuations are up with the events, we would only advise clients to selectively plough into Indian equity and, more important, also once we are more convinced that India will be roaring ahead for many more good years to come.
What’s your portfolio strategy now?
Essentially, we were advising clients to be slightly neutral to overweight on India in their globally diversified portfolio, where the investment personality permits – essentially, it has to be in line with their risk/return profile and expectations. With this overall stance, we raised the beta of the portfolio and were inclined to have more cyclical names and sectors, where valuation permitted.
However going forward, we are cognizant of the emerging phenomenon of ‘buy on rumour, sell on fact’ and would caution against being too aggressive in portfolio risks. We are more inclined to take profits and trim some positions at the margin, especially sectors and names that have done very well and where valuation is beginning to look quite stretched in the near term.
We are poised to evaluate the new economic policy to be presented by the Modi administration before committing any strong calls for portfolio adjustments in the medium term.
What about corporate earnings? Is the worst behind?
Based on consensus estimates, we are expecting double-digit growth for corporate earnings in FY15 (versus single-digit growth in FY14). The growth acceleration will likely be more pronounced in cyclical sectors such as industrials, materials and financials that could benefit directly from the improving domestic growth. Nevertheless, we will not be surprised to see some near-term consolidation, given the sharp run in share prices for many of these cyclical stocks. In fact, investors could over time look to rotate out of the recent outperformers to some fundamentally healthy and export-oriented stocks. In particular, names in the information technology (IT) and health care sectors have lagged the market over the past few months and could begin to look relatively more attractive.
Infosys has seen a change of guard with Vishal Sikka being appointed as the new chief executive and Narayana Murthy ending his second innings. How do you view these developments, especially the churn since the past one year?
Indian IT services firms are expected to benefit from improving global growth and a pick-up in corporate IT spending. Although we remain constructive on Infosys’ longer-term fundamentals, its share price could remain volatile in the near term, due to investor concerns over the management churn. Hopefully, the appointment of Vishal Sikka as the new CEO could bring about the much-needed stability but it might take some time before we see any tangible improvements.
