Indian share markets are expected to deliver modest but steady returns from current levels over a 2-3-year horizon, said Siddharth Vora, Head – Investment Strategy & Fund Manager – PMS, Prabhudas Lilladher in an interview with Harshita Tyagi of FinancialExpress.com. His positive outlook is based on decent forecast earnings growth in India on the back of favorable economic policies. “Our strategy is to stay nimble and exploit tactical opportunities as and when they arrive,” Vora said. Given the current environment of slowing global growth, tight monetary policy, high domestic equity valuations and low-risk appetite among global investors, 55% allocation to equities, a 23% allocation to short and medium-term bonds and a 10% allocation to gold and rest cash is the ideal investment strategy, he added.
Amid geopolitical tension, inflation, slowdown fears. Indian markets have relatively outperformed. Will this outperformance continue going forward?
Indeed, despite several headwinds and sell-off in risk assets globally, the Indian stock market has been relatively stable. There are several reasons for this outperformance. The domestic economic fundamentals are in much better shape compared to other global markets. While domestic inflation is high, at 7% it fades when compared with inflation figures of other countries. Even the Debt-to-GDP ratio for India is better of than bulk of the west including US, Europe & Brazil, further supporting the India story. We have already seen a decoupling of Indian equity markets from the global markets. Bulk of FII Selling seems to be behind us and well absorbed by domestic capital participants, thus in the current year, we have seen more resilience in Indian Markets. As we see the FII gradually returning to India, and following a period of aggressive sustained rate hikes and high inflation, we believe macros that lie ahead could provide a positive surprise.
However, there are a lot of unknown factors globally, that are yet to play out. For example, while we are seeing positive developments on global inflation front, we don’t have a clear answer to how long the inflation will stay above global central banks’ tolerance limit, how long the interest rates will stay high, and will the recession in global economies be a shallow or a deep recession. All these factors will continue to weigh. While I believe we will continue to outperform other markets, this does not mean the Indian markets will not fall, should any risk materializes.
With inflation data, and commodity prices tapering off gradually we believe overall pessimism around inflation and interest rates could come down. We are closer to the peak rate hike cycles as well, given the aggressive front-loading of hikes. Now that we see layoffs started in US tech companies, and demand coming off across the board, markets start looking ahead; demand destruction marks the beginning of inflation peaking out. India continues to be in sweet spot, with resilient macros, as global crisis is creating new opportunities for India such as Europe + 1, China + 1 over and above the Domestic Consumption story that India has always provided. Global opportunities across manufacturing, defense, chemicals, IT, textiles, capital goods provide added triggers to the India growth story. On the domestic front stable rural demand recovery coupled with a clean and healthy banking balance sheet in a strong credit cycle- make India more resilient amidst other countries.
Recently, IMF, World Bank, Moody’s have warned about recession, slowdown. However, they have stated that India remains better placed. Do you agree with that assessment as well?
India is definitely in a much better shape compared to most of the other economies on growth, inflation, and debt metrics. While the IMF has cut India’s growth rates for FY23 to 6.8% from 7.4% earlier, the downgrade is mainly due to external factors and global growth spillovers. The domestic economy continues to be robust as suggested by High frequency indicators like GST collection, peak power demand, recovery in Air Travel, Sales of Apparel, QSR, PV, CV, Housing, Capital Goods and improving capacity utilization.
Loan disbursals by scheduled commercial banks (SCBs) in India have increased impressively this year. Rural demand has failed to pick up due to high inflation but strong Rabi crop, declining inflation and likely increase in rural spending ahead of the 2024 elections will revive rural demand from 4Q23/1Q24. Urban discretionary spends remain strong and indicate strong benefit due to economic revival and demographic dividend in coming few years. Keeping this in mind from a pure growth perspective, India could stand out vs global peers.
India’s inflation is still above RBI’s threshold of 6%, trade deficit, CAD data is concerning, growth has been slow. Amid uncertainity, while FIIs pulled out money, DIIs remained invested, why so?
I would attribute this development towards greater women in workforce, strong job markets, Record retail participation, Ease of investing facilitated by technology, improving Financial literacy leading to higher awareness and and financialization of savings. These are the long-term trends which now have data to back their existence and growth. Lack of other investable avenues due to low-interest rates, high inflation pave way for equity assets to be better choices to earn higher inflation-adjusted returns. I think retail investors are directing more of their savings towards financial products like mutual funds and it is a very positive development. To some extent, the surge in SIPs in mutual funds has also contributed to the resilience of Indian equity markets. Earlier this year, we saw record outflows by FIIs from Indian equities; however, these outflows were absorbed by DIIs in a big way.
Are Indian markets overvalued at the moment? If so, what is the healthy P/E and what trigger according to you investors need to look at for the markets to reach that valuation?
India definitely looks overvalued at the moment. If we look at the trailing PE ratio, Nifty is currently trading at 23.3 PE, which is much above its 10 year average. The valuations look a lot expensive if we compare its equity valuations with other markets. For example, MSCI India today is trading at a premium of 98% with respect to MSCI Asia ex Japan. Just to give a perspective, other EM markets like Brazil, Mexico and South Africa are trading at 6.4x, 13.8x and 9.6x PE multiple respectively.
However, if we look at forward multiples, 1-year forward P/E of Nifty is in line with 10 year average of 20.6x as analysts are expecting a decent forecast earnings growth in India on the back of favorable economic policies. Notwithstanding the near-term volatility due to fluid global situation, if corporate earnings are able to surpass the expectations given benefit of superior growth, favorable Govt policies and demographic dividend, rising export opportunities, I believe India would provide modest but steady returns from current levels over a 2-3 year horizon.
Given the current scenario, what would be the ideal asset allocation strategy keeping interest rate, inflation monetary policy tightening, recession concerns in view?
We are currently following a balanced approach from an asset allocation perspective. We run an in-house quantitative model that captures factors such as domestic and global economic conditions, monetary regime, equity valuations, global risk appetite, and momentum across asset classes. Using this suite of in-house indicators, we arrive at an asset allocation mix. Given the current environment of slowing global growth, tight monetary policy, high domestic equity valuations and low-risk appetite among global investors, we have about 55% allocation to equities, a 23% allocation to short and medium-term bonds and 10% allocation to gold and the rest is cash. Since we follow a dynamic asset allocation model, our strategy is to stay nimble and exploit tactical opportunities as and when they arrive.
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