Midcaps will outperform largecaps over 2-3 years: Barbara McKenzie
Barbara McKenzie, senior executive director ¬ investments, Principal Global Investors, tells Prashant Mahesh that emerging markets will continue to see earnings improvement as they have bottomed out in terms of global commodity downdraft. Mid-caps will continue to outperform large caps over a three year period.
Edited excerpts:
The ruling BJP coalition has strengthened its hold in the recent elections. Do such events impact markets?
These things do tend to have shortterm impact, however in the long term investors investors look at earnings. There is so much macro event-driven trading going on in the market, but if you see historically, the good long-term stock pickers are doing extremely well. There continue to be good opportunities for long-term investors.
Its been a year of surprises. Brexit was followed by Donald Trump and despite this the US amrkets have seen a continued rally.
In terms of the buoyancy in global markets post Trump being elected here are two things: One reason I believe is the continued investments in infrastructure in US. When you think about this move, it will not only benefit US corporates but also overseas companies who could be suppliers, depending on what might get built. The other piece is that his cabinet members are also looking at potential financial reforms.
After the crisis, the passage of Dodd Frank bill in the US has had a profound impact on financial services -there are plans to pull back some of those reforms. There are talks of initiating reforms in some of the regulatory changes. On the back of that, you have seen financial services stocks moving. The third thing that has been much discussed is the Affordable Care Act and reform in the healthcare space. These are some themes playing out in US market. As we continue to move forward in the coming months, we will come to come what happens and we will get a sense later in the year. All these are sparking investor appetite and interest in US equities.
Will US equities outperform emerging markets in the coming year?
A lot of it depends on what currency you are an investor in. If you are a dollar investor, the US looks like a good place to invest. If you are a emerging market investor, in a local currency sense it would de pend on the earnings outlook of your country. Indian stocks have seen price appreciation in recent months, but you will have to see earnings keep pace with the rise to avoid disappointment. A lot of emerging markets have hit the worst point in the cycle, and things are improving. The pace of movement will be different for each country. Now we have bottomed out in terms of global commodity downdraft that was pulling down emerging markets. We should continue to see earnings improvement in emerging markets.
The Indian markets have moved up sharply in the recent past. Valuations look stretched. Are we looking at a correction here?
Clearly mid-caps have seen strong flows, but if you step back a bit and take a call over the next twothree years, as long as there is a cyclical recovery in place, these mid-caps should continue to benefit disproportionately from that. A large part of the economy and various sectors are only serviced by mid-caps. Midcap companies have improving capital ratios, improving efficiency, better governance and higher transparency, all of which makes us believe they will continue to do well. There may be some headwinds in the near term as they have run up very fast, but over two to three years, they will do better than the large caps.
GST is one big event in India, keenly watched by the investing community? What impact will it have on Indian equities?
It is a big event certainly, which is positive over the medium to long term. In terms of implementation, there is a big change, which will lead to challenges. Once those are sorted out, it will be positive for the economy. We saw Japan implement GST and maybe Malaysia, and what we saw play out is consumer spending tends to increase before GST and go down immediately.
What sectors or themes interest you in India?
We are stock pickers, our portfolio confirms alpha selection. We still believe cyclical recovery will play out. Based on this, we are overweight cyclicals, auto and neutral on financials. Most of the creation of NPAs is behind us, recognition little bit may come out but it will be slow. IT earn ngs is slow, but there is deep value there. We don't have large bets visa-vis the benchmarks.
Edited excerpts:
The ruling BJP coalition has strengthened its hold in the recent elections. Do such events impact markets?
These things do tend to have shortterm impact, however in the long term investors investors look at earnings. There is so much macro event-driven trading going on in the market, but if you see historically, the good long-term stock pickers are doing extremely well. There continue to be good opportunities for long-term investors.
Its been a year of surprises. Brexit was followed by Donald Trump and despite this the US amrkets have seen a continued rally.
In terms of the buoyancy in global markets post Trump being elected here are two things: One reason I believe is the continued investments in infrastructure in US. When you think about this move, it will not only benefit US corporates but also overseas companies who could be suppliers, depending on what might get built. The other piece is that his cabinet members are also looking at potential financial reforms.
After the crisis, the passage of Dodd Frank bill in the US has had a profound impact on financial services -there are plans to pull back some of those reforms. There are talks of initiating reforms in some of the regulatory changes. On the back of that, you have seen financial services stocks moving. The third thing that has been much discussed is the Affordable Care Act and reform in the healthcare space. These are some themes playing out in US market. As we continue to move forward in the coming months, we will come to come what happens and we will get a sense later in the year. All these are sparking investor appetite and interest in US equities.
Will US equities outperform emerging markets in the coming year?
A lot of it depends on what currency you are an investor in. If you are a dollar investor, the US looks like a good place to invest. If you are a emerging market investor, in a local currency sense it would de pend on the earnings outlook of your country. Indian stocks have seen price appreciation in recent months, but you will have to see earnings keep pace with the rise to avoid disappointment. A lot of emerging markets have hit the worst point in the cycle, and things are improving. The pace of movement will be different for each country. Now we have bottomed out in terms of global commodity downdraft that was pulling down emerging markets. We should continue to see earnings improvement in emerging markets.
The Indian markets have moved up sharply in the recent past. Valuations look stretched. Are we looking at a correction here?
Clearly mid-caps have seen strong flows, but if you step back a bit and take a call over the next twothree years, as long as there is a cyclical recovery in place, these mid-caps should continue to benefit disproportionately from that. A large part of the economy and various sectors are only serviced by mid-caps. Midcap companies have improving capital ratios, improving efficiency, better governance and higher transparency, all of which makes us believe they will continue to do well. There may be some headwinds in the near term as they have run up very fast, but over two to three years, they will do better than the large caps.
GST is one big event in India, keenly watched by the investing community? What impact will it have on Indian equities?
It is a big event certainly, which is positive over the medium to long term. In terms of implementation, there is a big change, which will lead to challenges. Once those are sorted out, it will be positive for the economy. We saw Japan implement GST and maybe Malaysia, and what we saw play out is consumer spending tends to increase before GST and go down immediately.
What sectors or themes interest you in India?
We are stock pickers, our portfolio confirms alpha selection. We still believe cyclical recovery will play out. Based on this, we are overweight cyclicals, auto and neutral on financials. Most of the creation of NPAs is behind us, recognition little bit may come out but it will be slow. IT earn ngs is slow, but there is deep value there. We don't have large bets visa-vis the benchmarks.
