India is a consensus overweight among foreign investors: Geoffrey Dennis

Dennis says that he sees a modest pick-up in global growth

As the markets head into a new calendar year, GEOFFREY DENNIS, managing director and head of global emerging markets at UBS Securities, tells Puneet Wadhwa 2017 will see a modest pick-up in global growth. Edited excerpts:

What is your assessment of how CY16 has panned out for the global financial markets, and what is the road ahead for 2017? 

The main feature of markets in 2016 was considerable volatility on a series of political events, but with a supportive backdrop of ample liquidity. The key features of 2016 were sluggish global growth; a falling dollar; rising commodity prices; and ample liquidity creation.

For 2017, we see a modest pick-up in global growth, but with only two rate hikes from the US Fed. The dollar will stay weak against other developed markets (DM) currencies but a touch stronger against emerging market (EM) currencies as a whole. We expect modest gains in EM equities, as earnings per share (EPS) grows around six per cent in the year. Key risks: i) Upside: stronger global growth with little rise in inflation; ii) Downside: sharp rise in inflation and bond yields; ‘populist’ victories in key European elections.

Do you see tighter monetary policies by major central banks across the globe in 2017? Will they pose a threat to the global equity market rally?

We expect the US Fed to raise rates twice in 2017; the European Central Banks to begin to taper from early-2018 onwards. This is a fairly benign backdrop for global equity markets. The dollar will stay weak against other DM currencies but a touch stronger against EM currencies as a whole. We expect US 10-year yields to fall back to 2.25% by end-2017 again as the US economy grows at just 2.4% next year.

How are foreign institutional investors seeing in India?

They are still positive on India, as it is the best growth story in the EM (GDP growth, EPS growth, returns on equity). The reform programme continues to advance, even if slowly and erratically. Demonetisation is seen as a major short-term hit to the economy but is positive for growth in the long term. Low inflation and interest rates, plus confidence in the Reserve Bank of India (RBI) is another advantage. Lower current account deficit leaves the markets less worried about the rupee, which is now much more stable than it was, for example, in 2013.

What are their key concerns? In terms of their pecking order for emerging markets, where would India be?

Valuations are rich at 15.4 times forward versus its long-term average of 14.6 times and EM at 11.5 times. Besides, we don’t know how bad the hit to the Indian economy from demonetisation is. India is a consensus overweight among foreign investors. We, too, are overweight India within the EM.

How do you view the demonetisation programme?

This is our economists’ call. We look for a sort of 'middle ground’ with GDP growth slowly to six per cent in FY17 and then rebounding to eight per cent in FY18; it is always hard to implement such a sweeping reform with no warnings and there will be short-term disruptions (as in this case). However, we are bullish over the long-term results of the de-monetisation reform. We still see the April 2017 target date for the implementation of the GST (goods and services tax) as doable.

What is your assessment of corporate earnings growth in India in FY17 and FY18 in view of demonetisation?

Roughly, we expect two-quarters to be hit by the demonetisation process. The Nifty FY17/18 EPS forecasts of our Indian strategy team, on our base-case scenario for the effect of demonetisation (above), are five per cent and 14%, respectively; our prior estimates were 10% (FY17) and 14% (FY18) and so we have cut estimates by 500 basis points (bps) due to demonetisation.

Which sectors are you overweight and underweight on right now in the Indian context? 

Our Indian strategy team is overweight in consumer staples, auto parts, coal, media, retail private banks, non-banking financial companies and telecom. They are underweight in auto (two-wheelers), corporate private banks, infrastructure and capital growth, IT Services, SMID (small and mid-caps) and cement sectors.