Bullish on global equities; India to gain from FIIs: HSBC

Philip Poole, Global Head-Emerging Markets, HSBC believes the global economy is improving in 2013 as signs of growth in the United States and China are much more evident than in 2012. He also added that Europe is also stabilising and overall, the global mood seems to be positive.

Overall, Poole is bullish on equities and added, "We believe that the value is in cyclical markets and sectors with some of the defensive markets and sectors looking quite pricey."
Besides, Poole also feels emerging markets at the moment look quite attractive. India too stands a fair chance of gaining from foreign inflows, he noted. "My view is that the inflows from external investors will continue to be a driver of the market in 2013 in India. One thing in particular to watch for would be Japanese money," he explained. Here is the edited transcript of the interview on CNBC-TV18. Q: Tactically how would you be positioned now, given the kind of moves that we have seen already in global markets?
A: I think coming into 2013, what we have seen is that the global economy seems to be improving. United States and China in particular are certainly growing more robustly than for most of 2012. I think there are signs also that Europe is stabilising, contracting at a decelerating pace. Hence, the global economy is improving and that is a positive.
We think the valuations in the equity markets, while they bounced are still pretty attractive and we also think that the event risks that were very problematic sometime in last year are being reduced. Overall, we are pretty bullish on equities. We believe that the value is in cyclical markets and sectors with some of the defensive markets and sectors looking quite pricey. Q: How do you see the year panning out for emerging markets in general? Do you see the current mood of risk-on prevailing through the year?
A: Certainly, I think the boxes that are being ticked reduced event risk. A better global economy, valuations that are still attractive make some of these emerging markets from a risk perspective look pretty compelling. I would say that markets like China and Russia for example, are cheap to their own trading history. They are cheap to peer group. They look attractive.
Other markets like Mexico for example, or some of the Southeast Asian markets actually look a little bit pricey relative to their own previous trading history. So I think you need to pick your stocks, but certainly many of the emerging markets look attractive.
_PAGEBREAK_ Q: Flows have been phenomenal this year for a market like India, of course last year we had performance on our side. What is the view on both money and whether India can continue to perform this year?
A: Certainly the market moved up strongly last year. In a way it was a market that many foreign investors felt uncomfortable with because of the macro risks, but it bounced very strongly. I would say that that was partly reflection of foreign flows. Those foreign flows were really evidence of money returning to the market that had previously left. But, I think there is more of that to come.
My view is that the inflows from external investors will continue to be a driver of the market in 2013 in India. One thing in particular to watch for would be Japanese money. Japanese monetary policy is likely to be eased pretty aggressively once the new governor is in place. That is going to be around the end of March when he is in office and I think we can start to see a front-loading of some of the measures that they have already announced.
In that case, expectation would be additional Yen weakness. On the back of that expectation, I think more money will come out of Japan looking for yield, looking for investment in undervalued markets and undervalued currencies and India certainly still ticks those boxes. Q: How important is the Union Budget for institutional investors and what would you be looking for over there?
A: We have seen an improvement in the policy stance, there is no doubt about that. For a very long time of course the government was frozen. It was not doing what was required on the reform front. The deficit was moving out of control. The Current Account Deficit (CAD) was widening partly on the back of some of those issues.
 
So I think, coming into the fourth quarter of last year, we have seen a more positive attitude from the government and we very much hope that it will continue. The budget of course is going to be a key test. There is an election due in 2014. It is always difficult for the governments when they have an eye on the elections to come with a budget prior to that. Therefore, I think quite a lot is riding on that budget. But, I am encouraged that the government has been taking more of the right moves. Q: A lot of comparisons are being made though in terms of how China has begun performing and its prospects look stronger. What would your pecking order be amongst the emerging market space right now and where would India feature there?
A: India still looks somewhat cheap to longer term average valuations, depending on which metric you are looking at. Certainly, we tend to look at price-to-book Return on Equity (RoE), but I think in the case of India, there is definitely a need to be very selective in terms of the sectors and the companies that one invests in. Our view is that the cyclical sectors look good value.
We continue to like consumer discretionary over the financials and also some of the industrials. Whereas we think sectors like healthcare, consumer staples look pricey. How does that fit into a broader emerging market view? If you look at the Brazil, Russia, India and China (BRIC) markets, we would argue that China and Russia are probably better valued, but India looks better valued than Brazil. So that is the way I would fit them into the BRIC optic.