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Last Updated : Jan 25, 2018 07:06 PM IST | Source: CNBC-TV18

Expect 18% earnings growth in India in 2018: Caesar Maasry

Watch the interview of Caesar Maasry Hd - EM Cross-Asset Strategy Goldman Sachs with Latha Venkatesh on CNBC-TV18, in which he shared his expectations from Budget 2018 and Indian economy.

CNBC TV18 @moneycontrolcom

Watch the interview of Caesar Maasry Hd - EM Cross-Asset Strategy Goldman Sachs with Latha Venkatesh on CNBC-TV18, in which he shared his expectations from Budget 2018 and Indian economy.

Below is the verbatim transcript of the interview.

Q: Before I come to what you are expecting from India and the Budget, first your view on emerging markets. Which emerging markets are growing faster than others? Where does India figure in your pecking order?

A: We are actually quite positive the growth story globally in emerging markets certainly, but India specifically. Last year, we had a couple of implementations obviously domestically in India including the implementation of goods and services tax (GST), you had the effects from the demonetisation earlier in the year of 2017. So having past those one-off slowdowns in growth, we see a pretty smooth path for gross domestic product (GDP) growth to pick up in India to the mid-sevens for the calendar year of 2018. So we are quite positive there.

Another important aspect here when we think about emerging market corporates which is very different from what we see in the US specifically is profit margins or operating leverage that effectively across the emerging universe, you have seen profit margin declines over the last few years as growth slowed and the last 12-18 months with topline growth picking up, we are not seeing an improvement in profit margins that has already happened in some parts, technology in particular, but there are few countries and again, India is one of them where profit margins had come down and only now are starting to recover. So in the macro landscape of strong growth in 2018, we see outsized earnings growth looking at about 18 percent earnings growth for Indian corporates in calendar year 2018.

Q: But then isn't much of that in the price? 2017 was a great year for equities generally, including emerging markets. Do you see any downside risk to this great bull run?

A: I guess the way you phrase it there certainly are upside risks and downside risks. I would be very quick to note however that the strong performance we saw last year in emerging markets was indeed fundamentally justified and the way I would arrive at that conclusion is if you look at the performance, so MSCI EM was up about 34 percent last year. Only 5 percent of that came from an expansion in the multiple which we would associate with melt-up risk, this idea that it is speculative.

The vast majority of the return came from a rise in earnings growth, about 22 percent came from earnings growth and about 5 percent from currency appreciation. So thus far, it is not fair to characterise this rally as a speculative bubble or a melt-up or so on, it has really been fundamentally justified and looking forward, as we discussed, we do think that growth pillar stays in place.

But clearly, the risk is going to be one of global nature and that effectively is what is the big event happening globally this year. Well it is the removal of monetary support, unconventional monetary support, whether we see the Fed raising rates, reducing the size of the balance sheet, the ECB presumably tapering the purchases in Europe. This could have liquidity effects. This is clearly a risk to global financial markets, but I think the key point here is that is actually also very much a DM risk. This is not a specific emerging market risk.

Q: Are you putting any fresh money to work in India and would you have any sectoral preferences?

A: Yes, to be clear, India is absolutely an overweight market. I do think heading into 2018, the dynamics will shift slightly compared to last year. What I mean by that is last year was a great year for fixed income, obviously in the Indian market. And you saw huge amount of inflows, somewhere in the order of about USD 20 billion coming into the fixed income market. In part, that was buoyed by obviously very low inflation also caused by low food prices.

Some of that starts to fade as we look into the next year. So clearly 2018 will be more equity centric. To be clear, we have a price target on the Nifty of 11,600 so, obviously things have moved a lot that we are still about 6-8 percent shy of that target. So we still do see upside. In terms of the sectoral composition, this is a thematic issue across emerging markets more generally, we would tend to rotate into some of the domestic growth oriented names. Now in India, you have a few of the industrial companies, some consumer companies that we like on that theme, but also, some of the banks and obviously the recap programme of last year should help that domestic flavour as well.

Q: You have been speaking about a Nifty target of 11,600, that is your upside target. Do you a downside target as well or a downside likelihood?

A: We do not have downside targets because we do think things will be moving higher. But I do think if you look historically it is very regular that EM equities have a 10 percent correction during some time of the year. In fact 2017 was basically first year since the mid-1990s where we did not see a 10 percent contraction at some point during the year and obviously subsequently you can recover from that. So if you are generally concerned about market pull back risk, I would say 10 percent is usually the right amount of magnitude.

Q: You spoke about banks earlier and the positives because of recapitalisation. Are you buying the public sector banks or would you prefer to stick with private sector banks?

A: Financials in general we like across emerging markets as a leverage to domestic growth. I do recognise that non-performing loans (NPL) have picked up in a number of economies and not just in India, but I would say at this point in the cycle, when growth is really improving, we are sort of less concerned about those NPL concerns. It is really when credit growth is starting to slow, you start to face some sort of recessionary risks that the NPLs become a much bigger issue.

So we do not really have a preference between private or public from my strategy team, but as a sector as a whole, again that is a way to leverage the domestic growth cycle which is where you really want to be. And the last point I would make on that is if we do go back to your question on melt-up risk and bubbles, when we do look across valuations, the one part that starts to look frothy if you will is the technology space. And that is a little bit if a global concern and that is also why at the margin, you want to rotate from those areas into the more domestic orientated sectors.

Q: Let me come to the liquidity issue. Global liquidity is so strong that both DMs and EMs are doing well. Do you see EMs outperform developed markets in 2018?

A: Yes, that is certainly a key pillar of our view. We do think that emerging market assets will outperform. Again, that is true in credit, but certainly also in equity. And basically the way I think about that is whatever you are getting in developed markets you are getting at a better price in emerging. There is a better growth profile, as I mentioned earlier, more upside in the margin, in the operating leverage component of the equity story, but also valuations. I am not going to tell your viewers that equities are inexpensive.

When you look at them any multiple basis relative to history, that when you compare them to developed market valuations, EM is still trading at a clear discount and this really matters for your global investor who is allocating capital across the equity landscape, the valuations are much more compelling in emerging markets.

Q: We have the big Union Budget next week. As an investor here, what is your biggest expectation from the Budget?

A: In general, we obviously look for the distribution of capital expenditures, expenditures more for growth as opposed to subsidies that tends to be more market friendly. But again, I would really point your viewers to look globally on this issue. Fiscal dynamics in EM are basically one of the areas that have not improved so much. Growth has improved, inflation has improved, meaning it has come down in most of the economies. Current account balances, trade balances have improved dramatically. India is certainly an example of that.

But the fiscal balances are I want to say secondary in nature at the moment. Fiscal dynamics become a big issue when you come into a growth slowdown and then we worry about much room the government might have to act counter-cyclically. But in the current environment of a very strong global growth tailwind, I do not think the fiscal dynamics are the most important issue facing the market.
First Published on Jan 25, 2018 06:20 pm
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