Adrian Mowat has been an India watcher for over two decades now and is currently chief Asian and emerging market strategist at JP Morgan. In an interview with FE?s Shobhana Subramanian, Mowat says the Indian economy should see robust growth and given this, its premium valuations are justified. Excerpts:
The Indian market has been fairly resilient; even if the Sensex is more or less where it was at the start of the year, it is the best performing market in Asia in 2010. Any thoughts on where the market could head?
We remain positive on India?s economy and stock market. Valuations are high but so is growth and one should remember that economic and earnings growth is in short supply globally. Bond yields in the developed world are currently low; yields on ten-year US, German and Japanese bonds are 2.48%, 2.15% and 0.91%, respectively, and the demand for both developed and emerging market corporate bonds is strong, so yields on these bonds are also falling. Investors are chasing yield and their confidence in developed market equities is low, which is understandable. We, at JP Morgan, are relatively optimistic on developed world growth with a forecast nominal expansion in 2011 of just under 4%. Compare this to India, which we forecast, will offer nominal growth in the mid-teens.
What do you make of valuations? Are they expensive? Do you think it?s possible that India will continue to trade at above-peer market multiples for a sustained period?
Valuations are not cheap but they are justified due to the India growth premium. As we have said growth is in short supply. Considering this premium growth, Indian equities deserve their premium valuation and we suspect that this premium valuation will continue and the market will rise with earning growth.
Do you believe that the projected supply of paper into the primary market, expected in the next six months, of close to $30-40 billion, could impact the trajectory of the secondary market?
The empirical evidence is that the best-performing markets often have a large quantity of equity issues. The weakness in the analysis is that strong markets attract equity issuance. If India?s fundamentals continue on track there should be demand for good quality exposure to these fundamentals.
FIIs have bought close to $11 billion worth of Indian stocks so far this year. How do you see flows into the Indian markets?
This 11-billion-dollar question has already been addressed in that considering the premium growth, Indian equities deserve a premium valuation. Indian investors need to focus on the economy and the market?s fundamentals. If these remain robust then FIIs should continue to be net buyers.
What is your reading of the results that have been announced so far? There haven?t been too many positive surprises.
Yes, the result season was disappointing relative to high expectations and within the Sensex, 13 of the 30 companies failed to meet analyst expectations, which is roughly 40%. The key theme was margin pressure, due to raw material and man power costs. Through the earnings season of the last six weeks, consensus earnings estimates for Sensex companies for FY11 & FY 12 have been cut by 1.4% each.
There are positives with management guiding that end demand is strong and capex justified an this is also reflected in the order book for companies such as Larsen &Toubro. We are positive on revenue growth outlook for most sectors but the key risk to current earnings estimate is from global sectors?materials and energy; we are very bearish on these sectors in emerging markets. Note that these sectors are forecast to contribute a substantial 60% of the current year?s earnings growth for Sensex companies. We doubt this will be the case.
How do you read the current macroeconomic environment in India? Do you believe inflation could upset growth targets because private consumption, for instance, hasn?t taken off, or is just about to take off?
Emerging market investors should always worry about inflation and, for now, the drivers of inflation are cost-push factors rather than excessive credit growth. This explains the RBI?s interest rate response.
Will the slowdown in China (Q2GDP growth at 10.3% YoY compared with 11.9% YoY in Q1) be to India?s advantage?Recent flows indicate that both China Funds and Greater China Funds are seeing large inflows…
Focus on fundamentals, not flows. China?s economic rebalancing is bearish for commodity prices. With the exception of commodity exporters (Brazil and Russia) lower commodity and energy prices are bullish for emerging economies, particularly for India. Simply, China is shifting growth from fixed asset investment to consumption. Economic policy is very pro-consumption. In contrast, a policy designed to address increasing income inequality by reducing property prices is pushing up property inventory, which will ultimately lead to lower commodity demand.
Which are your favourite markets right now, and why?
Our favourite markets are India, Asean, Turkey and among sectors we like technology?simply because of the undervalued growth.