CAD check reason to be relatively positive on India: StanC

Reema: If we look at the performance of the Indian market this entire week, we have got the Nifty, Sensex down 1 percent in contrast the Chinese market as well as the Hang Seng rallied close to 3 percent so the underperformance of India appears quite stark. Is the Vote on Account (VoA) on Monday which is keeping investors on the sidelines or have investors turned cautious on India vis-à-vis the rest of the Asian markets?

A: In our view there are two factors that work here; one is that Indian equities have performed quite strongly, if you go back over the past few months while Chinese equities have lagged. So, both the markets are starting off from a very different valuation starting point - Chinese equities are considerably cheaper. But the second fact definitely is that India does face risk around not during the Vote on Account but the broader political picture, running into an election is till not clear whether there will be a clear cut government or whether we will end up in a coalition of some sort. So, investors are trying to weigh the risks of political uncertainty against the market that is no longer as cheap as it was.

Ekta: What is your perspective on possibly the emerging market basket and where India stands relative to its peers at this point in time and the reason I ask is because we have a lot of political events which are lined up for India in the next two-three months especially with election and more closely is the Vote on Account or the interim Budget which is on Monday?

A: To start off with the broader emerging market picture – we still expect flat to slightly positive returns in aggregate but we do expect emerging markets as a whole to underperform the developed markets.

At the end of the day economic and earnings catalyst are positive in most of the developed markets, they are negative in many of the emerging markets but emerging markets are a fairly wide space and as far as India goes we are expecting performance to be broadly inline with the average and that is why we hold a neutral view because on one hand what has improved over the past few months are some of external fundamentals; the current account deficit has improved, interest rates are higher, so many of the currency related risk that were feared that often put India at the bottom of the rank on most risk measures about six months ago have look a little better but having said that when you are trading into an election, some volatility is unavoidable and when the market is not as cheap, we wouldn’t be adding much more at this stage unless we see some volatility. Buying on dips is something we would still be open to.

Reema: You said you are neutral on India but could you tell us how it stacks up compared to the other markets?

A: On top our emerging markets which (a) still have robust external fundamentals and (b) are more leveraged to the recovery in the developed world. So, north Asia – Korea, Taiwan which are recognised border line emerging market are on the border line from emerging and developed – we expect them to outperform and that is where our over weights are. On the other extreme the key underweight are still in markets like Indonesia, which are not cheap but continue to face a number of risks in terms of the economic external fundamentals. So, look at Indonesia or countries that are much worse such as Brazil, Turkey, South Africa which still face large current account deficits, large fiscal deficits, low Fx reserves. These would be at the bottom end of our preference and order where we will be underweight. So, India is somewhere in the middle where we expect stability, performance inline with the broader universe.