Foreign investors have been cautious about emerging markets: Raychaudhuri

Manishi Raychaudhuri, Head of Asia Pacific equity research, BNP Paribas
As India Inc starts to unveil its financial performance for Q4 and the year ended March 2020, Manishi Raychaudhuri, head of Asia Pacific equity research, BNP Paribas, tells Puneet Wadhwa that the markets across Asia haven’t adequately factored in persistence of consumer demand weakness arising from lockdowns, potential loss of employment, and credit events in over-leveraged pockets. Edited excerpts:

Where do you see the Sensex and the Nifty a year from now?

Over the next year, we would expect Sensex and Nifty returns to be in line with their earnings growth. However, corporate revenues and earnings are uncertain now – leading, to uncertainty in the market outlook. Looking at valuations, it doesn’t appear that the worst has been discounted.

After the recent rally since the third week of March, the Sensex and other frontline Indian indices are 20 – 25 per cent below their January peaks. However, consensus earnings estimates for 2020 and 2021 have declined around 15 per cent, implying that valuations are only about 5-10 per cent lower than their recent peaks. Equity markets across Asia haven’t adequately factored in persistence of consumer demand weakness arising from the lockdowns, potential loss of employment and credit events in some over-leveraged pockets.
Is the recent market exuberance justified?

The equity rally across developed and emerging markets have been fueled by large fiscal and monetary stimuli  announced by central banks and governments. A possible “second wave” of Covid-19 infections, though not in our base case, could lead to re-imposition of lockdowns and further demand destruction.

How are foreign investors looking at India as an investment destination?

Foreign investors have been cautious about the entire Emerging Market (EM) universe, including India. Since mid-February we’ve seen foreign portfolio outflows of about $52 billion from Asian markets, out of which $9 billion has flown out of India. While investors benchmarked to Asia ex-Japan are overweight India, those benchmarked to Global Emerging Markets (GEM) are slightly underweight and have been selling Indian equities over the past six months. Foreign investors seem to be concerned about the pace of consensus earnings estimate downgrades, a likely continuation of asset quality issues in banks and the likely delayed recovery in consumption and investment.

Which sectors and stocks do you think smart money will chase?

In India, we are currently positive on IT, telecom, private retail-lending banks, insurance and select consumer staples – particularly those that stand to gain from the consumers’ ongoing focus on hygiene and sanitation. In the energy sector, select oil refining and marketing companies (OMCs) and conglomerates are also in the India allocation of our Asian Model portfolio. We don’t have exposure to consumer discretionary, materials and industrials. Over the long term, consumption habits, working practices and producers’ supply chain decisions could change considerably. Indian corporate lending banks, IT and industrials could benefit as a consequence, though we believe those investment themes would take a long time to play out.
Is it a good time to start nibbling at mid-and small-caps?

Long-term investors can now consider mid-and small-caps with certain characteristics. We wouldn’t paint all small-and mid-cap stocks with the same broad brush. Our principle of stock selection within the mid-and small-cap universe is the same as in the large cap universe – consistent excess return generation, consistent free cash generation, healthy balance sheet and good management quality. In India a considerable number of stocks in healthcare, insurance, financial services and consumer discretionary fit the bill.

What are your projections for corporate earnings in FY21 and FY22?

Currently consensus earnings per share (EPS) growth estimate for MSCI India is 7 per cent in 2020 and 21 per cent in 2021. We believe the growth estimates could decline further – particularly in consumer discretionary, financials, industrials and materials. Information technology (IT) and telecom seem relatively insulated from the earnings decline pressure, though clearly not out of the woods.

When will demand for goods & services and fortunes of India Inc normalise?

Demand revival would depend on how fast the Covid-19 outbreak is contained, and therefore, how fast the lockdown can be lifted and factories reopened so that workers can return to work. China and other North Asian economies are in the process of exiting lockdowns and gradually restoring normal operations. Their experience tells us that normalisation could be a long drawn out process.

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