Abhiram Eleswarapu, Head of India Equities at BNP Paribas feels on one year forward P/E basis, most sectors are trading at a premium compared to their average valuations of the past decade. “When seen in conjunction with abundant global liquidity and low yields, Indian equities are neither cheap nor expensive relative to bonds.”
The Indian market has been historically been dominated by legacy businesses. “But over the last few years, smartphone adoption and data usage have surged and paved the way for digitally-driven business,” he said in an interview to Moneycontrol’s Sunil Shankar Matkar.
Abhiram further said even within existing businesses, BNP has seen a significant increase in spending on data analytics and technology. This is an exciting area to consider from a long-term perspective, he added.
Q: Have you spotted any trend at FII desk or what are favourite and disliked sectors at FII desk now a days?
We have started to see increased interest in stocks that have been lagged in the rally this year, generally irrespective of the sector, and more so in consumer staples and energy. In telecoms and media, there have been positive developments on the regulatory front and through corporate announcements which have caught investor attention.
Technology continues be on investor radars as well, especially the midcap space. Interestingly, we have seen a bounce in property names as well, possibly led by investors reallocating their weights away from the sector in China and elsewhere into India.
Q: Do you think the market is really overvalued now and can correct 10 odd percent in coming days before resuming further uptrend?
On a one year forward price-to-earnings (P/E) basis, most sectors are trading at a premium compared to their average valuations of the past decade. That said, when seen in conjunction with abundant global liquidity and low yields, Indian equities are neither cheap nor expensive relative to bonds.
Corporate earnings have improved over the past few months aided by a sharp recovery with vaccinations becoming widely available. Every dip is still being seen as a buying opportunity, especially with higher retail and HNI (high networth individuals) participation. For a sizeable correction to happen, we would need not only the recovery to slow, but also a significant change in liquidity conditions. The Fed tapering bond purchases would therefore be a trigger to watch out for.
Q: Will the India outperform other emerging markets in coming years and why?
India is amongst the top performing emerging markets this year. We have an overweight position on India in our Asia ex-Japan model portfolio and in fact increased this weight even further recently. India is benefitting from a continuous upward revision in consensus earnings estimates, a recent stream of supply-side policy changes, and ongoing liquidity support from the RBI. The Indian market may have also benefitted because investors have looked to minimize the risk from Chinese regulatory changes and the issues in the property market there.
Q: Lot of reforms including telecom, auto and banks announced recently. Do you expect more such reforms in coming days that can really boost confidence of market participants?
The Indian government and RBI have been proactive in introducing policies wherever needed, and this was especially the case in ensuring stability during the pandemic. We do not see a change in this stance. We think some of recent announcements such as the setting up of an asset reconstruction company (widely being referred to as “bad bank”) or those in telecoms are progressive in nature.
The performance linked incentive (PLI) scheme has been successful in electronics manufacturing and is being rolled out in new sectors. The government has also announced a large divestment program. Successful execution of these initiatives and laying out the path to achieve the infrastructure spending targets can further help increase investor appetite.
Q: Have you spotted any sectors where one can start investing now with couple of years perspective, and why?
One the most interesting developments for me is that several new companies are raising capital and India is producing new “unicorns” at a record pace. The Indian market has been historically been dominated by legacy businesses. But over the last few years, smartphone adoption and data usage have surged and paved the way for digitally-driven business.
Even within existing businesses, we have seen a significant increase in spending on data analytics and technology. This is an exciting area to consider from a long-term perspective. Among the large listed sectors, we think financials offer good value with valuations being reasonable relative to the market, and the potential for faster growth and balance sheet improvement still being underappreciated by investors.
Q: What is your reading on Federal Reserve policy meeting and its commentary?
We think that the Fed leaned more decisively towards a November taper at its meeting this week. The FOMC (Federal Open Market Committee) saw the softening in activity and employment from new Covid-19 cases as transitory, raised its inflation projections, and also sees a steeper path for policy rates than previously expected. Therefore a tapering of asset purchases of $ 15 billion per month starting this November is now our central case.
Q: Given the market at record high levels, what is the investment strategy one should adopt now?
Our longer-term investment strategy remains unchanged. Given where valuations are and the risk of lower liquidity ahead, we would pay even more attention to quality companies with solid management teams and businesses with strong moats that generate healthy cash flows at good return ratios, irrespective of the size of the company.
Q: Metal sector hit the most in last one month, falling around 10 percent. Do you expect some more correction in coming months?
Metals had a great run for the best part of this year led by improving demand and capacity constraints. But more recently new capacity announcements have been made. Furthermore, the sector’s performance is closely linked to PMI data which seems to have peaked. We think there may still be stock-specific opportunities given some of them have corrected sharply recently.
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