The situation in India, however, worries me. I believe that the RBI should not raise rates because it really cuts down on economic development. I don’t think they should worry so much about the currency; they should be worried about the inflation impact generally. There is a tendency for inflation not to go down but to go up in some cases in case of a rate hike. We’ll have to see if that’s the case in India or not.
What is your outlook for developed and emerging markets over the next one year?
Emerging markets, as I have been saying, will head for a correction and we have seen that already in some cases. We have a little bit more to go before they bottom out. That said, a lot of EMs are looking interesting. India is one good example where we can find stock-specific opportunities going forward. We are at a point where EMs are beginning to look good. The Indian market has been doing quite well, and there is more upside available.
How much upside do you expect in the Indian frontline indices from here on?
The Indian markets
have done very well since they bottomed out in 2009. I think we are good for another 10 per cent upside from here on. However, the emphasis will be more on individual stocks rather than looking at the overall index. If you look at the overall index, it is at an all-time high, but individual stocks do look interesting. Barring any sharp increase in interest rates, the Indian equity markets
should do well going ahead.
The recent rally has been led by a handful of stocks. Does that worry you?
Yes, that’s true. Not only in India but in the other parts of the world as well this is a cause for concern in the sense that exchange-traded funds (ETFs) have become so dominant. There is a real worry that these large-cap stocks can suffer and drag the whole index, thereby lead to a general panic situation in the market. That’s the reason why the commentary we are getting regarding the big fall in Facebook shares is coerced by index / ETF selling. That is mindless selling, and if it hits the large-cap stocks in India, then we can see a decline in the overall index. This will create a panic situation. This is why I believe the concentration should be more on value rather than momentum and on the real good small-and medium-sized companies rather than the large-caps.
Foreign investors have been trimming India exposure over the past few months. What are their key concerns?
The key concern is the fact that the reform programme may be held up. That’s one of their big concern as a result of the political environment; and also the interest rate situation. Investors are concerned that higher rates by the RBI could have a bad impact.
Globally, which regions/markets interest you besides India?
Asia generally looks good. The region continues to lead in economic growth. The region will be a big part of our portfolio. That apart, Brazil also looks particularly interesting now. Further down the road once the political situation eases out, Russia will also look good as well.
So, what does your portfolio look like now? Are you looking to up India exposure?
India is quite high in our rating. In fact, it is higher than China, which is kind of surprising. We think there are good opportunities in India, despite the fact that the benchmark index has been doing so well. The portfolio will be adjusted when we launch our fund in September 2018.
Which sector(s) in the Indian context are you looking out for?
The consumer sector is of particular interest to us. We think that there are great opportunities in the consumer sector – not only in India but also in the other parts of the EMs as well, where we can get some good performance from this segment.
What are your views on corporate earnings growth in India?
Corporate earnings should do well given that the economic growth numbers are looking good. This is one reason why we are seeing the bullish sentiment in the market. However, if the interest rates begin to have an impact, then one may see a different story play out. I will be very careful of highly leveraged companies, as they will be the ones that will get into real trouble. There is a chance that you get one stock/company that is heavily in debt and triggers a correction. Investors need to be careful here. Given the fact that the growth rate is around 6 per cent – 7 per cent, usually, company earnings should be double that. On a conservative basis, we are looking at least 12 per cent increase in corporate earnings growth in the financial year 2018 – 19 (FY19).
What is a bigger threat to the Indian equity story – earnings not picking up or a hung Parliament?
I think it will be a bit of both. A hung Parliament will be very bad because a lot of growth and optimism in India comes from the ongoing reforms. In case they are held up due to a hung Parliament, it would be very bad for the market. This is one thing we need to look at. That said, one needs to look at the results rather than what people think. And another fact that will impact are higher interest rates. So, a combination of these things could be bad for the Indian markets. That apart, the ETFs and index funds are massively selling the large-caps, which drags down the whole index. This can create another problem for the equities.
Is the worst over for the rupee? What about crude oil prices?
Another interesting point is the currency. It is interesting to note that the Indian rupee since January 2018 has weakened considerably against the US dollar. At this point, the rupee has stabilised. This is despite the fact that the RBI has hiked rates. The exchange rate, however, has not changed very much. All this indicates that we can get a big improvement in the rupee and the weakness has been arrested. So, the 68 level per US dollar seems to be about right. As regards crude oil, in dollar terms Brent crude should go around $100 levels. However, we are not anywhere near that level right now.
Global markets, it seems, are getting confused with the blow hot, blow cold on trade wars. What’s your interpretation?
It is actually a trade war between the US and China. Donald Trump has reached some agreement with the Europeans. So risk to that extent is pretty much off the table. Now, things are really focussed on China. The higher tariffs (10 per cent – 25 per cent on a whole lot of goods) could be quite positive for India because a lot of the replacement production could take place in India and other countries that have a competitive advantage. This is an opportunity for Indian businesses that they should really pursue really aggressively and increase their exports to the US.