Asian markets gain with the Shanghai Composite Index touching a new 7-year high as the People's Bank of China's comments hint towards further monetary stimulus. In an interview to CNBC-TV18, Vivek Misra, Strategist- Asian Equities, Global Research & Strategy, Societe Generale, said he is overweight on both India and China, with the latter being one of his top picks.
According to Misra, the investor flows have been relatively strong into India. He expects relatively strong earnings from Indian corporates over the next 2 years, with signs of improvement being visible in 2-3 quarters.
Societe Generale expects potential upside of 32 percent in India by 2016 and has a Sensex target of 32,500 by the end of 2015, Misra said.
Below is the transcript of Vivek Misra’s interview with Sonia Shenoy and Anuj Singhal on CNBC-TV18. Sonia: What is the sense you are getting about where the money is flowing out of and where it is flowing into now between India and China?A: Firstly I would like to that state that as part of our Asia-Pacific portfolio, both China and India are our overweight calls and China remains one of our top picks. Coming back to investor flows, investor flows in this year have been weak into China but been relatively strong into India.
Anuj: It is interesting you see a potential upside of 32 percent for Indian markets by 2016. What could be the key triggers for that?A: There are a few reasons why we like the Indian market. Firstly we think that policy is likely to be accommodative as well as the fact that we are seeing the beginning of economic reforms by the new administration. We are looking at another 50 basis points of policy rate cut in 2015. Also in our view corporate earnings which have recently disappointed, that cycle is likely to turn and over the next two to three years we are going to see a relatively strong earnings coming out of the Indian corporates and I would also like to state that improving global growth is good for Indian equities as well because lot of the large cap stocks are fairly geared to the global business cycle.
Sonia: So you expect strong earnings form Indian corporates over the next two years but what about in the very near term because this quarter is expected to be quite weak especially for certain pockets like PSU banks etc. What is your own forecast of how Q4 will pan out?
A: We do not look at quarterly earnings from that point of view. Having said that, the improvement would probably take about two to three quarters to come in. Anuj: What explains this recent big outperformance of China compared to India? This month for example, the relative outperformance has been very sharp, about 18 percent. A: When you look at the Chinese market, we need to first look at the two separate markets separately. One is the Hong Kong-listed Chinese stock and secondly the domestic shares. The domestic shares in China have outperformed the Hong Kong-listed stocks quite sharply. Now, the domestic listed shares are to a large extent driven more by the domestic investor in China but among the reasons why they have been outperforming is that one is there is an expectation that with the opening up of the Chinese market to overseas investors, more money will start flowing in as well as the fact that the high net worth individuals are probably have started looking at the equity market for investments.
Sonia: That is an interesting point you make that the Chinese market is expected to open up further for foreign investors. So, realistically what kind of returns should one expect from the Indian markets by the end of this year and from the Chinese markets and who do you think will out perform? A: Within the Chinese market, we now favour the Hong Kong listed stocks over the domestic listed stock market and we think that the Hong Kong listed Chinese stocks would be among the strongest out performers this year. Having said that, we also do think the India market should perform quite well. For the Sensex, our year-end target is 32,500 and for 2016 we are looking at a target of 38,000. Sonia: So, 32,500 by the end of this year. I was going through your report where you believed that the kick-start of the investment cycle is the key for revival in the markets as well. And you also say that the beneficiaries could be industrials and raw materials. So, in order to benefit from this impending revival in the capital expenditure (Capex) cycle, what are the sectors or what are those specific pockets that one should invest into within industrials, will it just be pure play capital goods or do you see the roads sector, ports sector, logistics? What are you betting on now?A: We think that buying into banks is actually a good way top benefit from the turn f the capex cycle. Also within industrials we like the industrial space as a whole.Anuj: You say that Indian market valuations right now are fair. At what point do you think the market will start to worry about earnings because a lot of the rally that we have seen has been hope-rally, but the numbers are still to catch up. If over the next two or three quarters we do not have earnings actually match up to the expectations, do you think there is a risk of a serious correction for Indian market.A: That is one of the risks in the Indian market that the expectations of an improvement in the Indian economy as well as in the corporate earnings. If they do not materialise over the next one year or so, there is a serious up side that we see in the Indian market ma not materialise at all.Sonia: One final question on what your pecking order is in the Asian equities. I understand that you have recently upgraded Japan as well, but what would your top three markets be and what would the order look like? A: So, my first pick would be China, my second pick right now would be Taiwan and then India. Japan is again a market that we like as well as Indonesia. So, these are the five markets that we are overweight on and my order would be China, Taiwan and India. Sonia: So, the money that goes into China, you do not believe that money could be moved out of India and into China, right?A: Generally speaking for both markets to do well, investors have to be fairly positive about emerging markets, more specifically about emerging markets in Asia. I am not forecasting a rotation between the two markets as of now.
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