Despite rally there are opportunities in markets, says Manishi Raychaudhuri

Manishi Raychaudhuri
The Nifty 50 hit the 10,000-mark last week. It has gained 22 per cent so far this year. Manishi Raychaudhuri, Asia Pacific equity strategist and head of equity research, Asia Pacific, at BNP Paribas, tells Puneet Wadhwa that though he remains overweight, the extent of that position has reduced slightly in the past couple of months, as India’s valuation premium to Asian peers has increased markedly. Edited excerpts:

Are global equity markets nearing a bubble? 

Global equity valuations are stretched but such overvaluation is concentrated in some pockets. Developed markets, particularly the US, are more expensive than emerging markets (EMs). Within EMs, Asia is more attractively valued vis-a-vis earnings growth forecasts. We believe despite the massive rally this year, there still are alpha generation opportunities.

What do bond market indicators suggest?

Bond markets, in general, are more expensive than equity markets. The average yield gap for Asia, the difference between earnings yield and bond yield, is three to four per cent, significant enough to make equities more attractive than bonds.

What is your interpretation of various statements by global central banks on monetary tightening?

A relatively more dovish tone seems to be emanating, compared to their stances a few months ago. We have toned down the expectation of rate hikes somewhat. We believe the next US Fed rate hike is likely in March 2018 (the earlier forecast was for December 2017), and there could be three hikes in 2018, against the earlier forecast of four. That said, we expect the US central bank to communicate in September about shrinking its balance sheet.

Why aren’t investors selling Indian equities, given the sharp run-up?

A few reasons behind lack of sell calls on India are: expectation of an eventual earnings recovery (though later than in North Asian markets), on the back of interest rate cuts and consumption resilience,  improvement in sentiment due to a more stable policy environment and simultaneous strong momentum in foreign/domestic institutional  flows.

Where does India stand in your emerging market/Asia preference list?

In our Asia ex-Japan model portfolio, we are currently overweight India. But, we reduced the extent of the overweight position slightly in the past couple of months, as India’s valuation premium to Asian peers increased markedly. 

The main global risks still arise from the possibility of liquidity tightening by global central banks, though that appears to have been postponed further into the future for now. Domestic risks arise from potential disappointment on earnings recovery and further postponement of the private capex cycle.

By when do you expect a pick-up or recovery in the capex cycle?

Given that the average capacity utilisation is 72–74 per cent in India, and most companies bring capex plans on the drawing board when utilisation levels reach 80-85 per cent, we think a commencement of the private capex cycle is still 12–15 months away.  

 
Government capex, however, is progressing well in roadways and railways and could have a multiplier effect on private capex. Select stocks in the industrial space, particularly those with a wide footprint and deleveraged balance sheets, could do well.

So, one should look at domestic economy-related themes?

We prefer the domestic economy-related themes, particularly those related to consumption resilience, policy beneficiaries (banks, owing to the RBI’s and the government’s focus on bad loans), and beneficiaries of a potential capex cycle recovery. Among the last category of stocks, we are careful about avoiding over-leveraged stocks.

What are your FY18/FY19 earnings estimates? Which sectors do you like and the ones you don’t?

Our earnings per share (EPS) estimates in FY18 and FY19 are Rs 1,700 and Rs 2,000, respectively. We like consumer discretionary sectors (particularly automobiles), select consumer staples that benefit from low-product penetration, private banks with retail lending focus, and a select few industrial and energy stocks. The preference on energy arises from recent regulatory changes, which could benefit a few companies significantly.


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