The country’s top investment managers believe that Indian equities are not cheap at the moment and are not totally decoupled from the markets globally.
“From 2008 onwards, the central banks took over the role of fund managers. For 13 years, they controlled equity markets, ensuring that markets don’t fall. That role got over in November last year,” S Naren, CIO, ICICI Prudential MF, said in an event hosted by Morningstar India on Wednesday.
India, said Naren, had a good chance of outperforming its Western peers because the country had seen less tampering of the entire framework from its central bank. That said, he reiterated that we live in a framework where all markets are connected and Indian equities are likely to see volatility going ahead, especially if global crude oil prices remain high and the Fed continues its hawkish stance.
“Equities will remain a volatile asset class till Jerome Powell comes one day at 11.30 pm (IST) and says ‘I am done with tightening’. After that, equities will become a great asset class everywhere in the world. Whether that will happen, six months or a year down the line, that’s the question all of us need to ask,” said Naren.
India is the best performing and among the costliest markets in the world today and when you are in this bracket the risk is slightly higher, said Naren. “Are Indian investors prepared for that? It’s difficult to say. But investors have to recognise the risk.”
Over the past year, the MSCI India index has outperformed the MSCI EM index by a wide margin. The Nifty now trades at 21x FY23E EPS, comfortably above its long-period average.
“This market is not cheap,” said Prashant Jain, former CIO of HDFC MF. “But if growth is persistent, which I think is the case with India, we should do well over time.” He said it was difficult to see higher levels of compounding at a diversified portfolio level in an environment where valuations were rich and the cost of capital was poised to move higher.
Jain believes that India has carried out important reforms in the business environment in the past few years, has a demographics advantage over Europe and the US, and has improved its competitiveness vis-a-vis China in manufacturing. “India is well-placed geopolitically,” said Jain. “For the first time in my career of more than two decades, I have not seen Indian companies complaining about their inability to compete with Chinese firms. The Ukraine-Russia conflict could work to our advantage. Energy crisis will make manufacturing more challenging in Europe and some of that could move offshore to countries such as India.”
The managers feel that Indian equities are only partially decoupled from the rest. “If global crude oil prices fall, even if US inflation goes up at some point of time, decoupling will continue. But if both oil prices and the US inflation stay high, our markets will get coupled,” said Naren.
Jain said Indian equities had moved from a peripheral asset class to a core asset class, which is why our markets were able to absorb more than $30 billion of FPI selling in the first half of the year and witnessed lower volatility amid global events. In crisis type of situations, there is a very high short-term correlation that Indian markets have had with those in the West, be it during 9/11, the Lehman crisis or the taper tantrum. But there is hardly any long-term correlation that our markets have with global peers.
Jain believes that India may be a beneficiary of sizeable foreign capital going forward, and if that happens, the currency may not depreciate the way it did in the past. “Oil prices remain a risk but let us remember that in 2007 oil was ruling at $140 per barrel but still we grew. We may slow down for a few years but it will not derail the economy,” Jain said.
Investment managers said investing in new-age companies is a big challenge. “Luckily, the first few failed in the market. If they had succeeded, I would be worried. That is what happened in the US – the first few succeeded, then some more, and everyone started coming at irrational, absurd prices. In India, since some have failed and failed spectacularly, the next few that tap the market will have to tone down their expectations and will be forced to think rationally,” said Naren.
“Some of these companies will turn out to be great companies eventually, but it is not easy to estimate long-term growth or profitability. One has to work with variable outcomes and that is what makes it challenging to have clear views on these companies,” said Jain.