Indian markets are at record high. What do you think is driving this rally? Is there more steam to this rally, or will the party be over soon?
The current market rally is driven by two main factors. The combination of a good macroeconomic situation, along with positive inflows, has driven the markets to record highs. Firstly, macro fundamentals of Indian economy in terms of the fiscal deficit, current account deficit and inflation are in good shape. Secondly, there was a sharp increase in financial savings and inflows into mutual funds. Economic cycle, along with earnings growth, is likely to improve over the next two years as we see the credit growth and capex cycle turning favourable.
Are Indian markets expensive? Why or why not?
The price-to-earnings multiple for the markets looks expensive but price-to-book value looks marginally above fair valuations. The market cap-to-GDP ratio is also marginally above average. Overall, markets are a tad above fair valuations.
When and by how much do you see the earnings recovery happening for Indian companies?
It is difficult to predict an earnings recovery on a quarterly basis.
Where does India stand in your EM/Asia preference? Why?
We strongly believe India is one of the best growth stories in the world for the next 20 years. Strong corporate governance, along with a stable political and economic environment, backs the economy. India is one of the best structural stories to be invested in over the next few decades.
Will Donald Trump’s tax cut plans impact emerging markets in a big way? How much impact do you see on Indian IT and pharma sector from the US visa restrictions and protectionist policies?
We don’t believe that Donald Trump’s tax cut plans would impact emerging markets in a big way.
However, if a negative policy comes through, we believe that the Indian technology sector could be negatively affected.
Are geopolitical risks being ignored by global investors?
It is difficult to predict which of these risks is being ignored or considered by global investors.
However, we believe that geopolitical risk, which the market does not know about or is unable to foresee, is the biggest risk.
What are the key risks to this rally in emerging markets, particularly India?
Any geopolitical event not expected by the market could be a key risk. Also, as I said earlier, this market is driven by inflows; so a big risk to the rally could be a sharp drop in flows.
Which sectors in India are you overweight and underweight on, and why?
We believe that infrastructure is one of the better themes to invest for the next three years. Infrastructure sector can do well in the long term. We are overweight on sectors such as utilities, telecom, select banks, and underweight sectors such as consumer discretionary at this point of time.