India has been a beacon of light amid the gloom as far as growth is concerned, but not everyone is as bullish on the country when it comes to investing in stocks. This is despite, and, perhaps, because of its outperformance over the other markets in the last few years, said Emerging Markets Equity Strategist Adrian Mowat, in an interview to Moneycontrol.
He said he finds it difficult to recommend stocks in India as the outperformance has led to overvaluation.
“I'm struggling to think about what I want to own in India, relative to what I can find in other markets,” said Mowat on March 15. “Within the major markets, my preference would be Korea, Taiwan, and China over India at this point in time.”
China is a deep-value trade, with a catalyst in terms of the opening up, said Mowat. It has abandoned its zero-COVID policy and has become aggressive in opening up its economy. From a valuation perspective as well, it is relatively much cheaper than other emerging market peers. This has led to the inflow of foreign money to the country.
“In Korea and Taiwan, you've got some deep-value tech. In the case of Korea, you've got quite a good exposure to the EV (electric vehicle) supply chain. So, those markets have better opportunities at this point in time,” said Mowat.
According to Bloomberg data, the main indices of Taiwan trade at 14.36 times its one-year forward earnings, South Korea at 12.85 times and China at 10.83 times. In comparison, India is much more expensive at 18 times its one-year forward earnings.
Weak commodities
While Mowat said he feels “embarrassed” he does not have any good stock recommendations for India, there are some sectors he believes may see continued weakness —prominent among them being commodities and energy.
In the last six months and one-year period, the BSE Commodities index has tumbled 12 percent each. BSE Metal is also down 1 percent and 11 percent, respectively. Similarly, BSE Energy is down 12 percent and 2 percent.
The weakness in commodities, according to Mowat, is also making him avoid stocks from even the sunrise sector of manufacturing in India, where he feels there is a structural story on account of global users diversifying their supply chain.
“I'd be a little bit more nervous at the commodity end – chemical, cement, copper, etc,” said Mowat, adding that he would rather wait for better opportunities to buy stocks related to this theme.
“India is very well placed for this. It has got the scale, it has got the education base, the technical know-how to be a significant manufacturing hub, and a place where the global supply chain can diversify as they try and reduce that China-specific risk.”
Shares of several contract manufacturers have seen selling in recent months as companies have tapered down their revenue projections in the wake of recession in western countries, with Dixon Technologies – a flag-bearer of electronic manufacturing – being the prominent one.
IT, financials fail to impress
Mowat also sounded unenthusiastic about the IT and banking space in India – two of the segments that have the largest weight in Nifty and Sensex. While the IT sector is facing a slowdown in growth due to the global economic turmoil, financials have valuation problems, according to Mowat.
“Indian financials look relatively expensive versus large benchmark financials (big names such as JP Morgan, Bank of America, Morgan Stanley, UBS, and HSBC have seen massive selling recently). So I'm not suggesting India has a specific fundamental issue. It's just on a relative basis. I might have better opportunities there,” added Mowat.
US-based banks saw excessive selling in the last week following the collapse of three regional banks. These collapses were the largest since the 2008 global financial crisis, which many underlined reeks of a larger problem in the US banking system.
Also read: Lessons learnt from SVB fiasco: What savers and depositors in India must do
Adani, a no go
Mowat also sounded uninterested in Adani group stocks despite them seeing a sharp correction in prices. Prices of Adani group stocks have tanked over 60 percent since January 24 in the wake of a scathing short-seller report that alleged fraud and stock price manipulation, among other issues. The group has categorically denied all allegations.
“A lot of institutional investors have decided to side-step Adani, and it hasn't been sitting in people's portfolios. That was primarily because the valuations looked high,” said Mowat. “We're still in a situation where the volatility around these stocks is so high, that it's very difficult for a long-term investor to analyse how the share price is going to move.”
“And for now, I would be very much in the camp of just staying on the sidelines and not having a strong view and certainly not committing the portfolio to these companies,” he said.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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