Index levels misleading; bet on pvt banks: Baring AMC

Fears of withdrawal of quantitative easing continue to haunt markets especially emerging markets which are likely to huge outflows once the pullback happens. Ajay Argal, head-Indian Equities, Baring AMC believes after recent tightening measures by Reserve Bank of India (RBI) most liquidity related issues are already factored in stock prices especially financial sector stocks.

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Like most market experts he is also of the view that Indian indices are not reflecting the true picture because the index looks strong, but many stocks have been beaten.
“We have a very divergent stock multiple where some of the stocks are trading at 30-40 times and most of the other stocks are trading in single digits. The stock multiples are very divergent and that is why you see opportunities in individual stocks and sectors rather than the market as a whole,” he told CNBC-TV18 in an interview.
Long term investors can consider investing in private sector financials, which are now on a strong footing. He expects private sector banks to continue to gain market share over public sector banks. “From that structural perspective, we still remain very positive on the Indian private sector financials,” he added.

Below is the verbatim transcript of Ajay Argal's interview on CNBC-TV18 Q: When tapering actually starts, will we see outflows from India funds or even emerging market (EM) funds?
A: It is not only related to the tapering, but also how the Indian economy is behaving and also what is already discounted in the stock prices. So, lot of discounting has already happened especially after the middle of the last month when the RBI did an abrupt U turn in monetary policy. Post that, there has been a reassessment by all the global investors and most of the liquidity related issues are already there in the stock prices and especially in the financial sector stocks. Q: Is this an opportunity for people to buy into Indian equity markets? Given the macro economic challenges are you still avoiding Indian equity despite the breakdown?
A: It depends on the investment horizon. If one has a very short-term investment horizon of one-three months then it is very difficult to say and that would be the same for all the markets globally. But if you take a long-term view and look not only at the index levels because index doesn’t give the full picture.
Index might look very strong in India but when you look at most of these stocks, they are trading at when the index was half of this. So, we have a very divergent stock multiple where some of the stocks are trading at 30-40 times and most of the other stocks are trading in single digits. The stock multiples are very divergent and that is why you see opportunities in individual stocks and sectors rather than the market as a whole. Q: You hold HDFC, Axis Bank and ICICI Bank. Now in the past 48-72 hours every big brokerage has come down with some kind of an earnings trimming, estimates trimming or even valuation trimming. Will things get a lot cheaper before they get better while as a long-term investor you will be making money in some time horizon?
A: If you look at the names that you have mentioned, two out of those three are already trading where you were indicating. So less than 1.5 price-to-book. If you look at price to earnings multiple though that is not what the financial stocks looked at but even very large financial private sector banks are trading at single digit multiples compared to consumer staples which are anywhere in excess of 30 multiples and even for smaller companies.
It is all a relative situation, we are still comfortable that relatively the private sector financials are in a strong footing even if you have a 9-12 months view. Beyond that if you have a three month view then there could be more correction. It all depends on the sentiment, it all depends on whether there could be more tightening measures taken by the RBI but you have to look at the structure as well.
Structurally, India is an under banked market, structurally the private sector banks will continue to gain the market share over the public sector banks for many years to come. So from that structural perspective, we still remain very positive on the Indian private sector financials.