'Foreign investors have started questioning India's growth story'

Gautam Chhaochharia, head of India research, UBS Securities
Risk-off sentiment continues to intensify across global equity markets as coronavirus winds a tighter leash around countries. GAUTAM CHHAOCHHARIA, head of India research, UBS Securities tells Puneet Wadhwa that they have downgraded FY21 gross domestic product (GDP) forecast by 50 bps, but have not yet trimmed the earnings estimates yet. Edited excerpts:

What is your outlook for the global equity markets in the backdrop of recent developments? Is the worst yet to come?

Our global economists have downgraded global growth forecasts and now expect the first quarter of 2020 (Q1-2020) to be the weakest quarter for global growth since 2008 as the impact of the coronavirus (Covid-19) and weaker oil prices bite. We expect a broader and stronger rebound globally from Q3. Under the scenarios where the virus spreads and does not recede until Q2 (intermediate case), or Q3 (pandemic case), the economic weakness in late Q1 intensifies but more importantly for annual growth, the recovery is weaker or delayed.

As per our global team, if the virus can be contained, global equities should make new stimulus-powered highs by 2020-end. North Asia and the United States (US) will likely lead gains, while Europe and the rest of emerging markets (EMs) lag. In the intermediate scenario, we still see a recovery in H2, but not enough to keep returns positive for the year. The pandemic scenario sees a major step lower in returns as growth slips with little additional stimulus at policymakers' disposal.

Your view on India?

We had turned bullish on India’s earnings cycle a couple of months ago driven by our four keys framework (exports, policy, credit, capex) after being earnings bear over the last five years. Of course, our framework had not incorporated one-off idiosyncratic events such as coronavirus breakout. Six weeks earlier, Covid-19 was mainly limited to China but now it has spread to 117 countries and situation is evolving making it difficult to predict. The sharp market correction (over 22 per cent from 2020 peak) has made headline valuations look attractive. Nifty 12-month forward price-to-earnings (PE) is below two standard deviation (five-year mean). Earnings yield is now higher than bond yield for the first time since 2008, making equities look cheaper. Recent correction is purely driven by multiple de-rating but off earnings downgrades, which are not factoring in disruption from Covid-19.

Is India Inc hopeful if a recovery in economic downturn?

Overall sentiment seems to be very weak. Over the next three years, we are constructive on earnings recovery and expect an earnings inflection ahead with growth being broad-based. There could be some pain in the next two-three quarters though given how Covid-19 situation pans out.

What are your views on the banking sector?

Our top down view remains that the banking sector is now much better repaired and recapitalised after a long non-performing loan (NPL) cycle. YES Bank-SBI development should also help in ensuring one of the last overhangs for the market is behind us. Remain overweight on financials though some banks/non-bank finance companies may see near-term pressure from risk aversion, if the process ends short of meeting market expectations

Have you tweaked your earnings estimates for India Inc for financial year 2020-21 (FY21)?

We have downgraded our FY21 gross domestic product (GDP) forecast by 50 basis points (bps). However, we have not yet trimmed our earnings estimates as yet. Sectorally, we are overweight financials, properties, oil & gas, telecom, industrials and small & mid-caps. Underweight on consumer staples, IT services and Pharmaceuticals.

How are foreign investors viewing India as an investment destination now?

India has been a growth story for foreign investors and they have stayed overweight on India for a long time. However, after prolonged disappointment, investors have started questioning India’s growth story. If we exclude recent market reactions due to Covid-19, India along with China were the only countries among Asia Pacific countries (APAC) peers who have seen net foreign inflows in 2020, till February. Leaving apart global macro-economic factors and general risk-aversion, key concern among FIIs is about continuity on India’s reforms narrative (labour reforms, privatisation, GST) and more domestic factors. Also, FIIs will focus on earnings growth post five years of disappointment.

How do you think the divestment agenda of the government will play out in FY20 and FY21?

Recent policy actions and narrative suggests that government is looking beyond piecemeal divestment i.e. strategic divestment with transfer management control. This is a long awaited reform by markets and could help government in significant value unlocking. Government is likely to miss its FY20 divestment target given progress it has made so far. However, we will not read too much into a year’s miss as long as it’s not deviating focus from strategic divestment.


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