Moneycontrol Be a Pro
Get App
Last Updated : Aug 07, 2015 08:12 AM IST | Source: CNBC-TV18

India fine story, can sustain high valuations: Adrian Mowat

Growing auto sales, benign inflation, and possibility of a pick up in earnings from 2016 are some of the positives that makes India story strong, says Adrian Mowat of JP Morgan.

India is the fastest growing large economy with benign inflation that will allow it to endure high valuations, says Adrian Mowat, Managing Director & Chief Strategist for Asian and Emerging Market Equity at JP Morgan. Mowat, a firm believer in India story, says growing auto sales, softer inflation, and a relatively dovish statement by the Reserve Bank (RBI) are some of the positives that makes him relatively confident of India. He sees the possibility of a pick up in earnings from 2016.

In an interview to CNBC-TV18, he said investments in Indian infrastructure will continue and so will ongoing inflow in domestic mutual funds.

He, however, remains cautious of dramatic rise in midcaps and believes if the RBI keeps rates unchanges even in the second half of this year, market may react negatively. He advises investors to remain with largecap stocks.

Below is the transcript of Adrian Mowat's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Sonia: We spoke to Adrian Lim, Investment Manager-Asian Equities at Aberdeen Asset Management and he said that the valuations of the Indian market are not cheap by any standard, so now it should be just stock picking quality stocks that you should go ahead and buy and not look at the market top down. Is that your view as well?

A: No. I think there are some macro factors to look at. We just had a relatively dovish statement from the Reserve Bank of India. We think structurally Indian inflation continues to move lower and there is a potential for India and countries like Indonesia where there have high policy rates to bring down those policy rates and in quite a meaningful way. So I would regard that as a macro story. The other macro story is a bit more fiscal traction, so the government  will be more successful in spending money in the second half of the year versus the first half of the year.

Latha: Because of these factors, are you seeing an earning uptick. What is the kind of earnings growth you are working with and do you see that getting bettered?

A: Unfortunately the trend throughout emerging market has been earnings downgrades. If we enter into more than easing cycle in India then that's probably going to be a story for faster growth in calendar year 2016 and that is also true with a bit more fiscal traction. So it is looking forward into '16 and that's going to be the key.

Latha: Your India economist Sajjid Chinoy yesterday wrote a note saying that he is not sure there is another rate cut. The broad consensus in the market is if at all there is perhaps one more rate cut. If you didn't get too much by way of monetary easing then would you change your view?

A: I think I would because if we keep policy rates where they are then real rates are going to be high in India and that will suppress growth. So yes, if the RBI does not move in the second half of this year, I think that will be a negative for the market.
 
Sonia: How do you approach it sector wise because you have a good mix of a lot of private sector banks, you have some quality technology names like Infosys, names from the auto space. However, from here on for the next 6-12 months how do you structure your portfolio sector wise?

A: You just mentioned our picks and that's what our picks are at the moment. I am not going to tell you the picks different from what we published.

So let's think about the trends that we are trying to play here. We do expect ongoing investment in infrastructure, there may be little bit more activity happening in the property space; rural India, which has been under a lot of pressure particularly with incomes perhaps get some relief from that, so building materials looks interesting perhaps even two-wheelers which have been showing very poor year-on-year increase in sales and that starts to look a bit better elsewhere as you highlighted the auto sector, so more of a consumer play. We do have a bias towards higher quality financials. We think that is the right way to approach the Indian economy.

Sonia: How do you approach it sector wise because you have a good mix of a lot of private sector banks, you have some quality technology names like Infosys, names from the auto space. However, from here on for the next 6-12 months how do you structure your portfolio sector wise?

A: You just mentioned our picks and that's what our picks are at the moment. I am not going to tell you the picks different from what we published.

So let's think about the trends that we are trying to play here. We do expect ongoing investment in infrastructure, there may be little bit more activity happening in the property space; rural India, which has been under a lot of pressure particularly with incomes perhaps get some relief from that, so building materials looks interesting perhaps even two-wheelers which have been showing very poor year-on-year increase in sales and that starts to look a bit better elsewhere as you highlighted the auto sector, so more of a consumer play. We do have a bias towards higher quality financials. We think that is the right way to approach the Indian economy.

Latha: I wanted one more point. I wanted your comment on it. Some people have been making the point that lower crude and lower gold is better in terms of flows into India. As well domestic flows when gold does not give returns, improves towards financial investments. Is there a liquidity argument that will make you stomach higher valuations?

A: There is and it is important that when we think about that valuations to remember what is going on globally. So, the World Index is about 17 times forwards. India is premium to global equities is actually very narrow at the moment. India is the fastest growing large economy globally. It has got a structural story in terms of a more benign inflation outlook and there is generally more comfort around the governance, the policy in India. So, I do think the market can sustain high valuations.

Sonia: As we speak, the midcap index has hit record high and that has been the story in the last couple of days. Many of these quality midcap names and even other midcap names have rallied. My question is if this scorching rally in the midcap space a bubble thing or is there more to go?

A: We have to be a little bit cautious about this because as you have highlighted, it has moved pretty quickly. I think the right thing to do is to be in the larger cap names and some of the names we were talking about earlier and that is probably a better way to manage your risks than perhaps chasing mid and smallcaps.

Latha: Are you impressed by some of the reforms in the public sector banks, notably infusion of capital?

A: It is certainly progress, we would suggest that perhaps, we are going to need further capital infusion. But this is good. We need to make progress in this direction. But our preference is really still for the private sector banks.

Sonia: Just one question on the flow situation because the inflows that we have gotten into our market lately has largely been retail driven. Retail investors putting money into equity schemes. In fact, there has been about Rs 2,000 crore per month coming into domestic mutual funds. Do you think for the rest of the year, it will continue to be driven by domestic money or do you see at some point a resumption of foreign funds as well?

A: I think if you think about the dynamics here in terms of the household savings, the household seeing lower fixed positive breaks and as you were already highlighting the gold prices has been going down. So, equities on a relative basis are looking more attractive. So, we expect an ongoing inflow into domestic mutual funds. Interacting with international investors, we have got emerging market equities, if you look at the broader indices around the 880 level, which is almost at its five year low. There is very little confidence in emerging markets. I am finding it difficult to get asset allocators to consider the asset class particularly this side of a Fed move. So, for inflows from foreign institutional investors, we are probably going to have to wait until after the Fed has moved. Our base case, it is September 17 and then perhaps, once you have got that event behind you, there will be a greater willingness to buy into emerging markets (EM).

Latha: Can you just give us a little more colour on the run up to September 17? Would you expect jitters even in the Indian markets? Any serious outflows?

A: I think there is risk because what we are seeing is trading volumes are coming down, so when you look at what investors are focused on, they are focused on the gyrations of the on-shore equity markets in Shanghai and Shenzhen in China. They are worried about the implications of the Feds. So, these are all reasons for inactivity and when you have low trading volumes, then typically, volatility can rise.

Latha: The rupee has been however a standout performer in the emerging market and maybe even across all currencies. Does that give you a sense that when the dip comes, or after that Fed related dip, India could recover more quickly at all?

A: Yes, the balance of payments story for India is very good. Also, held by the fact that gold and oil price is low. But remember, when you think about the rupee, it is worth drawing the chart back to 2012. There was a major correction in the currency in the second half of 2013. So, you had that reset of competitiveness a few years ago.

Sonia: You just briefly mentioned that the confidence in emerging markets as far as equities is concerned has been dipping. As far as we know, you have been one of the most bullish experts on the Indian markets. Have you reduced your enthusiasm on India or your allocation to the Indian market and how much by way of returns do you think India could give by the end of ay, the next 6-12 months?

A: With regards to India, if anything we have become relatively more confidence in the story. So, it is tracking the inflation numbers, it is tracking some of the activity indicators whether those be the industry purchasing managers index (PMI), looking at auto sales, looking at truck sales, cement production. So, we are seeing a gradual build up of momentum, lower inflation and that is making us more confident.

Remember, there are other factors at work here which is the risk of Brazil getting a rating downgrade, entering another year of recession, we have got the gyrations in the Chinese equity markets, a lack of confidence about what is going on in Malaysia. So, if anything, our relative confidence in India has been building. But remember that is a relative confidence against the asset class where some of the fundamentals are deteriorating.

Latha: Broadly, if you count IT and pharma as defensive and private sector banks and capital goods and consumer staples as cyclical, in the remaining part of 2015, which way may you tilt incrementally?

A: We have discussed this earlier, we have got a bias towards things like building materials, consumer discretionary, so there is a cyclical bias in the portfolio. That said, on a global basis, and remember, I am putting together portfolios that are international in nature. I can be overweight Indian IT as well as being overweight cyclical sectors. I do like the IT story in India. We have had key companies recording numbers a little bit ahead of expectations.


Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.
First Published on Aug 6, 2015 10:42 am
Loading...
Sections
Follow us on
Available On