HSBC calls India a defensive market, sees IT & pvt banks growing

HSBC has raised its rating on India to ‘overweight’ from the earlier ‘neutral’ and upped its Sensex target to 28,500 from 26,000 for this year-end.Domestic market is picking up in India and earnings expectations of 12 percent are more realistic, says Herald Van Der Linde of HSBC. “India is a more defensive market,” he says, adding that earnings growth is expected in certain sectors like IT, private banks and rural-related companies.A 4-5 percent upside is seen in the market from current levels.However, the domestic market still faces key risks like monsoon, to-be-appointed Reserve Bank governor, China and global events.Among global markets, HSBC is overweight on the US, but cautious on Europe and Japan. Post the UK referendum, impact on global companies has not been much, but domestic companies in the UK continue to suffer. Below is the verbatim transcript of Herald Van Der Linde's interview to Anuj Singhal and Sonia Shenoy on CNBC-TV18.Anuj: We have seen a big rally in most equity markets post Brexit day and most markets are higher than what they were when we went to that event, do you think the market is getting a bit complacent, it is trading at risk or do you think this market has strong triggers to move on now?A: There might be a little bit of complacency. First we have the initial surprise of the Brexit event. Markets came off then we see that policy responses are going through particularly the Bank of England (BoE) but also the European Central Bank (ECB) make some commentary. So that supports equities a bit again but if you look at the markets, for example even in the UK, the FTSE 100, which is multinational has rallied but the FTSE 200-300 which is domestic companies is still down. So clearly the impact on the global companies is not as much as on the domestic UK companies.You can argue there is a bit of complacency, it will take some data to some time before the first data comes through. I think another week or so or another month or so before we get the first indications of how the UK economy has responded and I wouldn’t be surprised if that is a bit of a negative and markets start to digest that again as well.Sonia: You have raised your weightage on India to an overweight and you have raised your Sensex target to 28,500 as well, what is the rationale behind this upgrade?A: We have been cautious for India for some time. More recently earlier in the year, we have raised it to neutral because India started to move in line with the rest of the region but I do believe that it is one of the most defensive markets at the moment. I don’t see a hell of a lot of an upside in Indian equity markets throughout this year. So being somewhat defensive is a wise thing to do.India therefore fits into a particular profile, in addition to that initially we have concerns about very high earnings expectations in India, analysts' consensus was looking for almost 20 percent earnings growth. This calendar year, at the start of this year, we thought it was way too high but we have seen those numbers now started to come down so we feel more comfortable with what we initially saw as risk factors as well.Anuj: I am looking at HSBC India strategy and the sector positioning is quite interesting. You have more weight on IT or technology compared to financials, what would explain that call?A: There are a couple of things at play here, there are parts of the markets which we like. So we like ones where we see a weaker currency coming through so companies got benefits from that, we like a few domestic plays, rural plays, we played that through a variety of sectors I must say. So it is a domestic, rural plus a bit of an international exposure in order to balance that off.Sonia: How does India feature in your pecking order now between developed markets and emerging markets because the view is that for the rest of the year, developed markets will underperform emerging markets, would you concur with that?A: Yes, we are cautious on Europe, we are cautious on Japan. In order for the weights to work, we have an overweight in the US but I must say it is more than overweight because we don’t see as much upside in Europe and Japan. It is not that we think that the S&P 500 is going to perform very strongly or so. So emerging markets -- we have taken an overweight position on it and within that Asia looks good as well and within that India looks good as well.Anuj: The gaining view on the market is that you will have easy liquidity continuing, you will have the ECB, BoE, Bank of Japan (BoJ) all supporting the market and even the Fed will not go for rate hike up until December. Do you think a large part of money flow will go towards emerging markets or do you think that is too simplistic an assumption right now?A: Global monetary conditions will continue to be very much in the easing mode, I should say. A lot of people have put forward the interest rates hikes in the US into 2017 now, some people are even talking about 2018. So it is likely that this lower interest rate environment rule continues to stay with us for quite some time to come.If it comes to risk, emerging markets very often have seen a bit of risky environment. So people might attach a risk factor to it but so far that risk is very much concentrated in Europe, it is very difficult to see what the impact is on India. India should be very muted, we just have the couple of companies which have some operations in the Europe and the UK. But overall speaking the impact shouldn’t be as much although the initial risk appetite that comes from these kinds of unexpected reasons, will make people a bit worried about emerging markets unless these risks originates in Asia, I don’t see any reason why this risk premium should be persistent such as they think that the emerging markets do look somewhat defensive in that case.Sonia: So, since that argument is sorted, let us move a little more closer to home. You did mention that a 12 percent earnings growth expectation is a realistic one. Which are the sectors where you are noticing some green shoots in earnings and sectors that could perform or rather see a faster growth than others?A: I would actually not look at it on a sector basis, but if I look at the whole country, India is one of the countries where we actually see margins starting to improve. So the lower oil prices is sticking through and that is helping companies because the packaging cost, etc. has come down. So, that is one thing that happens in a variety of sectors. Earnings growth should be okay for selected private sector banks. It should still be okay for the IT sector maybe a little bit weaker, high single digits or so, but that looks quite okay. And we think there might be a bit of a pickup in part of the rural economy as long as of course the monsoons are not doing any particular damage, but at the moment, it does not seem necessary to be the case. So, we think anything that is exposed to rural and this could be consumer, staples, could be a bit of consumer discretionary, could be part of finance as well.Anuj: What is the key risk to our market? Is it domestic in nature, is it valuation or is it still global?A: The key risk for India at the moment, I see a couple of factors. One is simply the monsoon which there is nothing too much you can do about it. The second one is the replacement at Central Bank. We do not know yet who comes in so we do not yet what the new kind of monetary policy that is going to be set. That is another domestic factor. The third risk I think is if China rolls over and this damages the emerging markets universe. That could happen. And then of course, other risks simply global events, but a lot of those risks we know, so markets can position themselves for that – that is the US Presidency, that is Brexit and that is what happens in Japan as well.Sonia: I know this sounds like crystal ball gazing, but we cannot let you go without asking you whether you expect to see a new high in the Indian markets anytime this year.A: A new high as against from where we came from the beginning of the year, I see a couple of percentage points upside for India. We are talking about 4-5 percent upside from current levels. So, I would say I hope we get a new high, but I am not quite sure if we really get there. But a couple of percentage points upside, that is reasonable, it is really driven by earnings growth generated in India and that earnings growth looks quite reasonable to me, fairly stable and should not necessarily be impacted by global events too much.