Cautious on India; EMs undervalued, buy on dip: AMP Capital

Shane Oliver of AMP Capital Investors maintains a cautious stance on India given its relatively high inflation rate and its trading at relatively high price to earnings multiple compared to emerging market (EM) average. According to him, elevation inflation, will constrain Reserve Bank of India's ability to stimulate the already subdued economy. 

Speaking to CNBC-TV18, he said, global recovery is likely to continue and will benefit EMs, but they may not outperform in the immediate near-term. "Emerging markets currently are undervalued compared to developed markets. Any weakness in either Indian share markets, or global share markets is a buying opportunity because once the US debt ceiling is resolved, it will set us up for a year-end rally," he recommended. Also read: FY14 CAD may be lower than estimated $70bn: Rangarajan Below is the verbatim transcript of his interview on CNBC-TV18 Q: Do you think that the US government will remain obdurate and allow the debt ceiling to be breached? A: It is very unlikely that America won’t increase the debt ceiling and I am optimistic that this will be resolved in a favourable way. The reason I am optimistic is because usually in the US, they wait for the very last minute and so, it could go on for few days moret but I am sure there will be a solution. It is almost inconceivable to see America allowing itself to default on its debt. Both sides of politics know that; the speaker of the house John Boehner has said that he wouldn’t allow it even if he had to rely on democrat votes to do so. I think there will be some sort of last minute deal but even if there is no deal to increase the debt ceiling then it is more likely that America will cut back on other spending rather than them servicing its interest payment. So I think it is a very unlikely scenario but because this period of uncertainty could drag on for a while yet - the October 17 deadline is still a week away and of course the crucial payments by the US government won’t be occurring to perhaps early next month. So, it might be a while before we find out whether there has been a solution or not. Q: Coming back to the developed markets (DM) and emerging markets (EM) trades, what is the sense you are getting after all those IMF numbers - is it a revelation of fresh weakness in EMs or do you think all that is known to the markets and that will not be any reason why fresh flows will not come? A: I think the latter is correct. The weakness in the emerging world has been well-known for the last few months. In fact, it intensified a few months ago but now recent news has been somewhat more favourable, particularly for China. So if you look at the IMF numbers, the reason it revised their global growth forecast was solely because of downward revisions to the emerging countries not the advanced countries, which is an interesting turn of events compared with the last five years. However, it was well-known months ago that the emerging markets were having some difficulty and that is why the emerging market shares had underperformed. My feeling is that those factors are already factored-into the share markets. You can buy emerging markets shares now on price to earnings multiples of 10-11 times whereas when you buy US shares for example, you are paying 14-15 times depending on which measure you look at. So it is a fact that emerging market shares are undervalued compared to their global counterparts. My feeling is that if the global recovery continues, which I think it will, that will benefit the emerging world and they will probably start to outperform at some stage, maybe not straight away but I would say that in sometimes in the next few months. So I don’t think the IMF numbers telling us anything new. Q: What is the sense you are getting within emerging markets especially with respect to India, we are not in that 10-12 percent, 12 times valuations at all, valuations are still fairly rich, we were saying experts were telling us that even at 5,200 and now we are sitting at 5,900, what is your view on the index itself, the money seems to be coming in still, we are getting FII equity flows and a fair decent amount of them almost a billion in the last five weeks or so, do you think there is a case to be long even at this juncture? A: I would be cautious on India. There were a lot of concerns if you go back a month or two, when there was all that talk about the US Federal Reserve starting to taper its monetary stimulus, the money was starting to flow out and of course the Indian Reserve Bank of India (RBI) along with several other Central Banks of the emerging world, were tightening internal conditions to try and get that money to stay rather than going outside and also protect their currencies. Those more immediate issues seem to have settled down but I think the reality is that the Indian share market is still trading on a relatively higher price to earnings multiples. It is not as extreme as it used to be but it is still relatively high compared to the emerging markets average. On top of that India has a relatively high inflation rate, which will constrain the ability of the RBI to stimulate the economy. My feeling is that we can go through a period of underperformance by the Indian share market going forward. So, even though the emerging market shares might bounce back at some point, I would suspect that Indian shares might be able to bit of a laggard.