India specific factors, rather than global factors are weighing in on Indian equities at the moment, says Sunil Garg of JPMorgan in an exclusive interview to CNBC-TV18.
Garg says monsoon is clearly causing disappointments but the fact remains despite a few rate cuts since the beginning of the year, credit growth has not reponded and is languishing below 10 percent. In addition, the RBI commentary suggests there aren't going to be further cuts. So in the short term the market appears very soft with further room room for correction, he says. This will mean India will continue to underperform China in the short term leading to fund reallocation favouring the dragon nation.
Below is the transcript of Sunil Garg\\'s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Latha: What is the sense you are getting of both the international and domestic factors impending on India? Do you think this 11-12 percent that we have lost is largely because of global factors, what will you watch out for for a turnaround or at least a stoppage of the hemorrhage? A: A lot of the weakness that we are seeing in India is due to India factors. So I think if we look at the last week’s rate cut and I think the indication by the RBI governor was that they probably didn’t have too much room for further monetary easing so that was a clear disappointment. We have seen oil prices jumping up a little bit in recent times so that is a global factor but if I want to look the couple of domestic factors, monsoon clearly at this stage is causing some disappointment on the delays and then more importantly despite the few rate cuts that we have had since the beginning of the year, credit growth is not responding, loan growth is stuck at about 10 percent, I think the earnings per share (EPS) growth estimates for the current fiscal definitely seem to be optimistic. We have seen a second half analysts start to adjust a numbers downwards so at this stage, the consensus EPS growth numbers of 19-20 percent definitely look a little bit optimistic. So I think if I look at the overall picture, there is definitely room for some more softness to continue and also predominantly due to domestic factors there are global factors at play as well but I do think India specific factors are weighing in. As to what I would be watching, the most important thing to watch for is that any of these stimulus measures that the RBI and the government have put in, they do need to start going into some kind of loan growth picking up, EPS revisions turning positive. So I don’t think we have seen the bottom of that but these are very important indicators we will be watching to get a little bit more positive in the near-term. So short-term could be looking a little bit further soft from here.
Sonia: Is there a risk of further under performance versus markets like China? A: At the moment that would be the call, China is clearly getting driven by easing of policy which is driven in this tremendous liquidity; the markets definitely getting progressively opened up. Again if you contrast that with some of the constituents you are facing in India and in negative earnings, revision cycle risk, very clearly India is underperforming the region and certainly China. There is definitely more risk of that. Latha: Aside from the earnings rating cycle turning from downgrade into a larger number of upgrades is there valuation level at which funds might stop selling. Is at 7,500 the bargain bay or at a level where you at least want to stop selling because there is value? A: It is interesting question you asked because we are trading at 17 times and that is based on current earnings estimates. If the earnings estimates are going to get cut further then the price to earnings (PE) multiples are actually going to look even richer than what it looks like. So, to some extent it becomes the story on playing the earnings because that really needs to change direction and that is what would make the valuation look attractive. If you look at a further drop in the market but at the same time you seeing a earnings cur coming through as well you are not getting the markets cheaper than the headline PE numbers. So, it still boils down to an earnings revision that becomes more important unless of course you start assuming a very large drop in the market. So the value argument will emerge more driven by the denominator rather than the numerator.
Sonia: What is the nature of the foreign institutional investor (FII) selling that we are seeing and going ahead for the rest of the year do you see a lot more by way of selling just purely because the Index at this level doesn’t seem to be oversold despite the correction we have seen? A: You are right. It is not oversold and we have seen selling by the foreign institutions but my understanding is domestic institution have been buyers obviously that has not been enough to stand the fall, it does that the nature of selling seems to be broadbased. We have discussed in the past that, I am going to generalise here, but investors have been overweight and with a weaker currency and weaker markets that is a positioning that hurts. While the position in China have probably been a bit lighter so clearly some reallocation has been going towards that market as well. It seems to be a little bit more broadbased from the way we see that. Latha: When and where do you see US yields peaking and will that be material to the inflow or outflow into markets like India? A: A lot of focus is on what the Fed is going to do in, what yields are doing and the important thin is we expect that the Fed will hike in September. The path from thereon is still going to be dependant on how the data shapes up. What we have seen with the yield curve is really starting to price that in. It is unlikely to be one big steep change. I think it is going to an evolutionary path as far as interest rats are concerned. It has caused obviously a lot of nervousness amongst emerging markets on what happens when the Fed raises. However, the reality is if you look back in previous instances is that eventually the rate increases are going to be in response to stronger growth which is generally good for emerging markets. So you go through periods of dislocation initially but eventually this is positive for emerging markets. However, there is short-term risk there. There are other emerging markets and other markets in Asia which are probably a little bit more sensitive to US treasuries going up, I think India probably is a bit less so and that is function of how much foreign money is in the bond market. The foreign money in the bond market is still a fairly small proportion and if you contrast that with Indonesia or Malaysia where these numbers are 40-50 percent ownership by foreigners that becomes a far more meaningful place to look for an impact.
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