‘Indian equity valuations, although not very expensive, are not cheap either.’
As the markets prepare for the January-March 2022-2023 quarter numbers of India Inc, Singapore-based Ritu Arora, CEO and chief investment officer for Asia at Allianz Investment Management, in conversation with Puneet Wadhwa/Business Standard, says financial services and consumption-related sectors will lead to market recovery from here on, galvanised by infrastructure and corporate capital expenditure investment.
Is it safe to assume that the worst is over for the global financial markets?
It is too early to announce that the worst is over.
Concerns around systemic risks from the fastest rate-hiking cycle since the 1980s, higher-for-longer rates, geopolitics, debt issues in certain emerging markets, and impending growth slowdown could result in continued volatility.
Central banks should continue to proactively intervene, wherever needed, to safeguard the financial system from a contagion risk.
Is a cut in interest rates by global central banks on the cards?
Aggressive rate hikes may not be required from here on out.
Central bank decisions on rate pauses/cuts should largely be motivated by core inflation and economic conditions in their respective domestic economies.
Many central banks (in India, Malaysia, Indonesia, South Korea, Canada, and Australia) are already pausing rate hikes.
Policy rates may remain steady this calendar year, against market expectations of multiple rate cuts in 2023. We expect policy rates to start coming off from next year.
What is your view on Indian equity markets?
We see sustained growth potential in Indian equity markets in the medium to long term, notwithstanding short-term volatility.
However, growth slowdown/moderation, which is already taking shape in the developed markets, will start impacting the domestic economy and EMs with a lag.
Indian equity valuations, although not very expensive, are not cheap either at 19x one-year forward.
Price-to-earnings may not be factoring in the growth slowdown in the near term.
India remains the most expensive equity market in the region and amongst the most expensive globally.
We believe Indian markets may correct and provide better entry opportunities in CY23.
High-quality businesses with strong moats and healthy balance sheets should do well.
Which other equity markets in the Asian and EM context appear more attractive than India?
Apart from India, Indonesia and the Philippines continue to be relatively attractive markets, considering the favourable domestic demographics and ongoing urbanisation.
These are well-run economies and equity valuations are also reasonable at 12-13x one-year forward P/E multiples.
Both these countries continue to be lucrative from a foreign direct investment perspective as well.
Singapore and Malaysian markets offer attractive dividend yields (over 4.5 per cent), in addition to capital appreciation potential.
What about China?
China could be another market to watch out for in the near term, depending on its domestic economic revival and potential recovery of the property sector.
India happens to be the most expensive market in the region for similar growth potential.
However, slowing growth will affect all these economies with a lag and needs to be carefully observed.
When do you expect foreign institutional investor flows into Indian equities to pick up?
FII flows are largely correlated with the global interest rate scenario, economic growth outlook, relative attractiveness of the asset class, and country valuations.
As the high global interest rate environment corrects itself, we will expect growth to bottom out over the next three to four quarters.
Thereafter, Indian equity markets with faster growth will again become relatively attractive investment opportunities.
This will drive FII inflows into Indian equities in a meaningful way.
We are already witnessing FII inflows in March and April 2023 — a good indicator for the Indian equity market.
Can subpar India Inc earnings over the next few quarters be a market sentiment killjoy?
Indian and EM growth should slow down with a lag and reflect in the corporate earnings as well over the next few quarters.
While this may dampen sentiment in the short term, long-term investors need to look beyond those quarterly earnings numbers.
From a long-term strategic asset allocation perspective, we expect India’s earnings growth (compound annual growth rate) to be likely in the low to mid-teens.
This should be amongst the fastest in the world, driven by domestic demand and infrastructure growth push.
Where do you think the leadership will emerge from in case the markets stage a recovery?
Financial services and consumption-related sectors will lead to market recovery, led by infrastructure and corporate capex investment.
Cleaner bank and corporate balance sheets, healthy credit pick-up, rising domestic demand, and capex spending will likely set the tone for recovery, and a sustained positive run after a near-term dilution of sentiment.
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