FII flows could remain volatile till June 2019, says Manishi Raychaudhuri

"Consensus EPS growth for the MSCI India in FY20 is still close to 20 per cent and that could potentially decline by about 5 per cent"

As the markets gear up for the outcome of the Assembly elections in early December, Manishi Raychaudhuri, Asia Pacific Equity Strategist at BNP Paribas, tells Puneet Wadhwa that the markets eventually look for policy continuity. The Assembly election outcome is unlikely to change that conclusion, he says. Edited excerpts:

Where do you see global markets over the next few months? 
 

Currently, investors’ concerns on equities are hovering around a potential economic slowdown, particularly in the US and China; the trajectory of rate hikes by the US Federal Reserve (US Fed) and the consequences of the US-China trade war. Some issues, particularly the trade conflict and China’s slowdown, are unlikely to be resolved in a hurry. Consequently, the present volatility in the global and Asian markets would continue for one-two quarters longer. 

Which markets in the emerging markets (EM) pack are attractive?
 

In the near term, we are more focused on stocks and themes rather than on markets. We like quality stocks with stable earnings estimates, sustainable cash distribution prospects by dividends or buybacks, and without obvious headwinds like high leverage or US dollar debt. We like financials in developed Asia and consumer discretionaries in under-penetrated regions such as Asean and India.

How does India look? 
 

India presents a curious combination of improving macro but pedestrian micro. With the sharp decline in oil prices, the risk to India’s current account deficit and fiscal deficit now appears considerably lower — and that’s reflected in the stabilisation of the Indian rupee. GDP (gross domestic product) has revived strongly from the trough in the second half of 2017. Consumer price inflation (CPI) has also been under-shooting the Reserve Bank of India’s (RBI’s) reference range for the past three months. But the economic tailwinds don’t seem to be getting reflected in corporate earnings. 

Can you elaborate on your corporate earnings projections?
 

The July–September (Q2 FY19) quarter earnings were largely disappointing. Among non-financials, segregating the oil and gas companies, corporate revenues grew 14–15 per cent year-on-year and earnings grew about 8 per cent — marking a deceleration from the April-June 2018 quarter (Q1 FY19). 
 

We could see further downgrades to consensus earnings estimates for FY19 and FY20, possibly more for the latter. Consensus earnings per share growth for the MSCI India in FY20 is still close to 20 per cent and that could potentially decline by about 5 per cent, we believe.

What are the key risks and how much of these risks are priced in?
 

Investors in Indian equities will have to choose sectors and stocks carefully. Risks to Indian equities arise from the possibility of further earnings downgrades, potential disappointments on the fiscal situation if goods and services tax collections don’t improve, and probable volatility around the election outcomes. We think these risks are not yet adequately priced in Indian equity valuations. At a 2019 Bloomberg consensus price-earnings (PE) estimate of 16.3 times, India is at a 50 per cent premium to Asia ex-Japan — and that premium is a standard deviation higher than the long-term average.

How prepared are the markets for the upcoming assembly elections?
 

In the near term, we think election outcome-related volatility is quite likely. Election outcomes have been difficult to predict in India, but if, in the northern and central Indian states the ruling combination does worse than what the opinion polls are predicting, we could see a near-term correction. 
 

The markets often treat assembly election outcomes as indicators for what might happen in the general elections. In the event of a worse-than-expected performance by the National Democratic Alliance (NDA), the resultant risk-off sentiment might get prolonged. That said, the markets look for policy continuity and we don’t thin the assembly election outcomes are likely to change that conclusion.

Will flows into equities slow down further ahead of the general elections?
 

FII flows into India could remain volatile till the first or second quarter of 2019 — till investors have some visibility about the US Fed’s glide path of interest rate hikes and the consequent impact on EM currencies. Such visibility might coincide with the Indian general elections. These important global and local milestones need to be behind us before we see a sustainable improvement in FII flows. Domestic mutual fund flows, notwithstanding the short-term wobbles, could be more resilient. 

What are your top overweight and underweight sectors?
 

In India, we like private banks, particularly the retail lenders, select auto stocks, primarily the market leaders and niche segment leaders, frontline information technology (IT) stocks after the recent correction, and select industrials in anticipation of a capex cycle recovery — possibly in H2-2019. We are focused on NBFCs (non-banking financial companies) with relatively limited ALM (asset-liability mismatch) issues and the ones which are seeing relatively strong loan growth.