India attractive; see 15% returns from global mkts: AMP Cap

Reema: What is the view looking now on the global markets? Just a while back, we had a lot of volatility in the bond markets, the dollar index is weakened, have things stabilised and what is the outlook now?

A: A lot of that volatility arose because the back-up in bond yields that we saw particularly in Europe and that flowed through globally. And of course as bond yields backed up it put pressure on share markets to some degree. So, that was the basic cause to what was going on there. My inclination is to think that is largely behind us. I know we are in the seasonally week part of the calendar year. This period May to October is often quite volatile but the broad outlook for share markets remains fine. If you allow for still relatively low bond yields, very easy monetary conditions globally, the fact that the global economy is still growing albeit a bit too slowly, all of those things are only quite positive for share markets. So, the broad trend is likely to remain up despite the volatility we have just seen.

Sonia: In your report, you have written that share markets are likely to see another year of reasonable returns. But when you say reasonable, what are you looking at and especially for a market like India, what could be the returns from now until the end of the year?

A: In a world, I guess, of relatively low inflation, reasonable is something like eight to ten percent and India’s inflation rates are a little bit higher than that - running at about five percent. So, India might be a little bit stronger than that. But, globally, if you think globally, returns are looking of the order, probably around 15 percent given what we have already seen so far this year. Even if go through further consolidation, then rally at the end of the year, we are still on track for returns of around 15 percent. In the case of the Indian share market, it has had a tough ride more recently and that is largely because foreign investors bored heavily into Indian shares last year on the back of this impending victory and then the actual victory by Narendra Modi. And that sort of buy on the rumour effect discounted a lot of the reformist agenda that he would put through and since then you have seen a bit of a consolidation going on in Indian shares.

But even in India, despite the relatively rich valuation, it is still reasonably attractive compared to markets like Brazil, for example, or much of South America where the commodity price downturn is still impacting and of course, economic reform is still a distant pipe trick. So, broad outlook for Indian shares is fine even though the stock has been a bit more constrained.

Reema: Yes, but even then, the likes of Brazil have outperformed India so far in 2015. the returns that the Brazilian index have given is 10 percent compared to one to two percent for the Indian market. But coming to the India-China debate. So far investors I the last few months have shown a preference for the Chinese equity markets over Indian. Will that continue?

A: That is an interesting question. Do not forget that foreign investors need to be separated from local investors and of course, what has happened in China is that it is local investors who piled into that market. So, there seems to be a rotation going on in the Chinese share market between the property market and of course, the share market. So, the property market has been out of favour and investors have been going back to shares particularly when the valuations became dirt cheap last year. My feeling is that there is still more upside for the Chinese share market, but the easy gains are behind us. We have gone from single digit price to earnings (P/E). The (P/E) is now 15 to seven, eight times depending on which one you look at. So, a lot of the valuation story, that aspect, that cheapness has been removed. But by the same token, over the next six months, we will probably see more signs that the Chinese economy that growth is stabilising and therefore that should give further impetus to the Chinese share market going forward.

Foreign investors have not been big participants in that rally. The trouble with India is that foreign investors have been heavily loaded up on Indian shares. And so, as we came into this year, I guess doubt grew about how quickly the reform agenda would proceed, that has caused foreign investors to hold back a little bit because to a degree they are already in there. They are already loaded up. So, you probably need to see a bit of that optimism regarding foreign investors unwinding a little bit before it starts to outperform in a relative sense again.

Sonia: To summarise for us which are the markets that look over-heated now and which will perhaps give relatively low returns by the end of the year and on the flipside, which are the markets that top your list?

A: We do not see a lot of markets significantly over-heated globally. I still see poor return potential out of bonds, so that is sort of at the bottom of our list. And in fact we have very low positions in global bonds, it is around five percent in global investment grade. We have a small position in Australian government bonds because the yields are quite attractive there. But by-an-large, I see bonds as being relatively unattractive. I do not see a huge sell-off just the underlying yields are quite low. And then if you look around the world where the opportunities are, they are probably in Asian equities. Valuations overall still look pretty good in Asia. China, Hong Kong, China story is good for a valuation story but Hong Kong looks okay, South Korea, reasonably good value there, Taiwan looked reasonably good. And also if you go across to Europe, valuations there look reasonably attractive and as the European recovery proceeds and quantitative easing continues, then that should help European shares. So, I may know of a way in European shares and Asian shares at the moment. Japanese share market also looks reasonably attractive. And with regards to the US, a bit of a quandary on that one there. The US has underperformed year to date so maybe we could have a bit of a bounce back. But in a broader sense, there is still probably better opportunities outside of the US.

Reema: The two uncertainties as we see it now, one is a Fed rate hike, perhaps in September, perhaps in October but perhaps sometime this year. And second is the Greek debt repayment. Are both these two likely to rattle the market or considering the fact that we have been talking about it for so long, now they are largely priced in, the concerns?

A: That is a good point you made at the end there. We have been talking about both of those things for so long so, it could well be that they are priced in. That said, there is still a potential for them to rattle the markets. The Greece more in the short-term because they are getting up to crunch time, they have to reach an agreement at least by the end of this month to avoid major defaults. So, that probably will reach an agreement, I am not too fast about it, but I do think though that if they do not and given the nervousness around it could cause volatility in the very short-term.

The Fed is probably a bigger one. I mean even if Greece decides to default and it does not, that would only have a relatively modest negative impact on European shares and global shares because the rest of Europe is in much stronger shape than what is the case last time Greece was going through its problems two, three or four years ago. In terms of the Fed, it is probably the most significant one to watch. My feeling is at the moment the investors are reasonably comfortable the Fed will not tighten till September or later. If it does look it might be earlier, then that could cause volatility and if you go back to 2004. Back to 1994, when the Fed last started raising interest rates after major rate cutting cycles, the US share market did have eight to nine percent correction. So, the Fed is the one to keep an eye on and what the Fed does of course reverberates globally because it impacts the US dollar. So, in my view that is probably the key focus going forward in terms of the risks to keep an eye on.