Moneycontrol
Aug 03, 2017 04:22 PM IST | Source: CNBC-TV18

Domestic savings liquidity has aided Indian markets, says Adrian Mowat

Issues such as goods and services tax (GST) and firm rupee denting earnings, said Adrian Mowat, MD & Chief Asian and Emerging Market Equity Strategist at JPMorgan.

Issues such as goods and services tax (GST) and firm rupee denting earnings, said Adrian Mowat, MD & Chief Asian and Emerging Market Equity Strategist at JPMorgan.

He further said that earnings upgrade in India has been a tad bit disappointing versus other emerging markets (EMs).

Domestic savings liquidity has aided Indian markets, he added.

JPMorgan was expecting a hawkish stance from the Reserve Bank of India (RBI) and somewhat of that did come about.

Adrian said manufacturing Purchasing Managers’ Index (PMI) was weak due to GST but can see it rebound going ahead.

He thinks India is a more extreme example in Asian sphere with regards to inflation.

Mowat has been telling clients all over the world to avoid consumer staples since 2016.

Below is the verbatim transcript of the interview.

Latha: Nifty at 10,000. Is this making your comfortable or uncomfortable?

A: We have had many discussions about the valuations of the Indian market over the years. India, as we look at the numbers is about 0.8 of a standard deviation expensive versus its 10-year average. Statistically, that is not a problem number itself.

If you consider the dynamics of demonetisation, then the preparation around goods and services tax (GST) particularly how that seems to be impacting some of the manufacturing numbers based upon the Purchasing Managers' Index (PMI) would have probably at somewhat subdued levels of activity and perhaps earnings. So as we think about calendar year 2018, it is probably reasonable to get a recovery in earnings and the valuations to be acceptable at these levels.

Please remember that we are looking at India within a global context. There are only a few sectors in India that are doing better than emerging markets. Most important one will be financials near-term and obviously that has been recently helped by the RBI's decisions.

Reema: We are halfway through the earnings season in India and which companies positively surprised you where you would look to add to your positions?

A: We have not pre-cleared any specific companies to talk about during this interview.

Reema: Any sectors where you have been positively surprised, where you would increase your bullishness or vice-versa?

A: The materials space has been interesting and the valuations there though have actually moved up versus their average. I think it is more mixed in the other sectors and if anything, India has been a market that has been conspicuous in having earnings downgrades against a context of the other emerging markets having earnings upgrades and that reflects the issues which I have already discussed - demonetisation and GST.

Reema: You were telling us about the sectors which positively surprised you in the earnings season in India where you would look to increase your holding and vice-versa.

A: The reflection that I had as the emerging market strategist is we have been disappointed in India in its relative earnings revisions versus other emerging markets. So issues such as GST, such as a relatively firm rupee getting some of the export earnings combined with noise around demonetisation. It has given us a condition where it has been hard to beat the numbers.

Latha: Nevertheless, what seems to be working in India is this wall of money that keeps coming from perhaps other assets like gold and real estate and maybe just cash ahead of demonetisation under pillows? Will that impact the pecking order in which you place India?

A: To some extent, the way that is working is that based upon valuations and expectations, we may have less money in India than we do because of flow dynamics that you have highlighted. So, I would argue that there are two big net buyers of India at the moment. One is the domestic savings boom because as fixed deposit rates have fallen, very little money is moving into real estate, confidence around precious metals is relatively low and that is favouring equities as an asset class which clearly has delivered pretty decent returns and good momentum and we do know that retail does tend to follow momentum.

So the second big buyer is the flows that we are seeing into emerging markets and a fair amount of the inflows goes into the massive products. So when the exchange traded funds (ETF) computer starts buying India, it does not check what the multiple is. So you have got a very favourable technical situation which is pushing valuations to a higher level than they would be if there was an active manager making decisions to be buying the market.

Latha: The financials - after the RBI policy yesterday, which seemed to indicate not much space for further rate cuts, the market is sulking big time, it is not just banks, I guess even real estate, real estate financiers, housing finance companies are all sulking a bit today. Because of this policy, how would you alter your stock picking?

A: Our economists have written about this before meeting and he was expecting a hawkish cut. To some extent, that is what has come about. The central banks globally are struggling with this issue around inflation. There has been statistically very significant undershoot of inflation versus forecasts across the world and so central banks, they thought that they would be on a normalisation course and may be having a little bit less confidence around that because they are not meeting their inflation targets. In parts of the emerging world, we are seeing inflation moving a bit lower.

India possibly is a more extreme example in the Asian sphere in terms of inflation undershooting forecasts. Now if we think about the central banks conundrum here, the PMI for manufacturing in India was pretty weak, but that seemed to be explainable through GST. It is possible that you then get that weakness reversing and perhaps, reversing and more and it could be, we just have that sort of low point, that low point in demand, that low point because you have had a reversibly strong currency, we did have reasonable correction in commodity and energy prices. But in responding to the inflation data today, that might be a mistake if the Indian economy now begins to pick up haste moving into calendar year 2018.

So I have a lot of sympathy for the RBI at this point in time. Now what does that mean for the market? It is much better for the market that the economy gets better, gets stronger that any disinflationary force moderates, that is going to be a much more powerful driver of earnings rather than relying on discount rates and we also need to think about those discount rates in a more medium-term context.

So, let us be less caught up in we need lower rates and more in let us hope that the cyclical recovery begins to come through.

Reema: Are you telling your investors to book profits in the Indian fast moving consumer goods (FMCG) companies because of high valuations and the earnings disappointment?

A: I have been telling clients to avoid consumer staples globally since the first quarter of 2016. These stocks considerably outperformed in the five year bear market for emerging markets. They are statistically very expensive versus their history. You are willing to pay a premium when growth is in short supply. I do not want to own that style of company. In India, you had as noise around that trade though. Remember, demonetisation caused a sell down in consumer staples. First quarter you go into recovery and you are back into underperformance in consumer staples. It is not an India-only story; it is a global story because there is plenty of growth out there in the world, in the equity world that I look at. So I do not need to pay excessive premiums for it.

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