As long as rates can decline, valuations not a major risk: Herald van der Linde

Interview with head of equity strategy for Asia Pacific, HSBC

Global equity markets have had a good run in the last few months despite events like Brexit and an uptick in commodity prices. HERALD VAN DER LINDE, head of equity strategy for Asia Pacific, HSBC tells Puneet Wadhwa that any new evidence that would make a rate rise in the US in 2016 more likely would be a key risk for the market rally. Edited excerpts:

Do you think that the returns from equity as an asset class could be minimal over the next couple of years, as Europe prepares for Brexit amid slowing global growth and the possibility of a rate hike by the US Federal Reserve?

It is always possible that equity returns are negative in one given year. Often, this is because valuations multiple decline from high levels or negative earnings growth in a market or region. In Asia, both these two risks are low; so I would suggest that the risk of negative returns in the next years in Asia is rather low as well.

How does India stack up against its Asian and emerging market peers amid all this?

India grows faster but is also more expensive. It is also more defensive. In time when cyclical markets and low price-to-earnings (PE) markets outperform, as it did in the past few months, India can underperform. But given the improving growth outlook in India, I think the outlook for positive equity returns is good, also when compared to other emerging markets (EMs). As long as Indian interest rates can decline, high valuations are not a major risk yet.

Which regions / markets are you overweight and underweight on?

We like India and selected ASEAN countries such as Indonesia. We are overweight on EM in a global context, and the United States. Our underweights include Europe.

What are the key risks to the rally in global equity markets?

New evidence that would make a rate rise in the US in 2016 more likely would be a key risk. Weakness in China's economy could be a key risk for the EM universe.

How are the corporate earnings in the Asian and the Indian context shaping up against expectations?

It appears that Asian earnings, and India is not an exception to this, were overly optimistic at the start of the year. Throughout the first half of the year, we saw earnings downgrades in a wide range of markets. It now appears that this is coming to an end - expectations and reality, in so far visible in the current reporting season, seem to be close together. We are at the bottom of the earnings downgrade cycle in Asia and, it appears, in India as well.

The latest earnings growth forecast for India are 13.6 per cent for 2016 and 18.4 per cent for 2017. We like rural oriented sectors, especially in the consumer space. We don't see need to change this strategy because if we would so, we would have to change our view!

How are the foreign investors viewing the India story now now? What more would you like to see from the government in its remaining tenure?

In general, foreigners believe that whole overall reform has disappointed the sky-high expectations of two years ago, that meaning reform is taking place on the ground. Progress on the GST is encouraging as well, although the details and implementation will need to be scrutinised in the future as well.

Inflation has yet again reared its head yet again in India. What is your outlook for interest rates in this backdrop?

Inflation has ticked up again, but the Reserve Bank of India (RBI) kept the policy repo rate unchanged in its most recent meeting. Important here is also that the RBI's decision to inject ample liquidity is important given the upcoming FCNR (B) outflows.

On the macro front, the RBI retained its five per cent inflation forecast for early 2017, but in the same breadth highlighted upside risks arising from sticky core prices. Rains, Monetary Policy Committee (MPC) members and the next RBI governor will determine future action. If rains are sufficient, we expect a 25 basis point (bps) rate cut in the fourth quarter of calendar year 2016.