Markets are not expensive at the index level: Anup Maheshwari

Interview with executive vice-president and head of equities at DSP BlackRock Investment Managers

With the markets rallying nearly 19 per cent since December 2016 lows driven by liquidity, ANUP MAHESHWARI, executive vice-president and head of equities at DSP BlackRock Investment Managers tells Puneet Wadhwa that flows to India will continue, as investors across the globe look for countries which offer higher growth, stable politics and reasonable valuations. Edited excerpts:

Have the markets run ahead of fundamentals?

In absolute terms, while the S&P BSE Sensex is trading around its all-time high, we cannot say the same in regards to valuations and metrics like price-to-earnings (P/E), price-to-book value (P/B), market capitalisation-to-GDP and corporate profits-to-GDP. The valuations are above their long-term averages but certainly nowhere near its 2007 peak valuations. Markets across the globe have rallied over the last one - two years and India is no exception to this. Reforms momentum, lower interest rates and stable global growth should bode well for markets, going forward.

Can global developments - snap elections in United Kingdom, Trump's policies and developments across the euro-zone - trigger a risk-off phase in equities over the next few months?

Markets usually tend to react on speculation and most of the events mentioned above have already played out to an extent. So, we believe that incremental damage will be limited. However, triggers for market corrections normally come unannounced. During such corrections, it becomes important to evaluate any potential impact of the event on earnings and valuations and then plan accordingly. The victory of the business-friendly and pro-European Emmanuel Macron in the final round of the French presidential elections has reduced the perceived political risk in Europe, at least for the time being.

What is the road ahead for fund flows to emerging markets, and to India?

Foreign Portfolio Investors (FPIs) have invested around Rs 7 billion in Indian equities (and Rs 7.5 billion in Indian fixed income) since the start of 2017. We believe this trend will continue as investors across the globe look for countries which offer higher growth, stable politics (recent National Democratic Alliance's win in UP) and reasonable valuations. For the first time in a decade, we are witnessing a synchronous recovery across the emerging (EMs) and the developed markets (DMs), which should bode well for liquidity in general. EMs will lead the global GDP (gross domestic product) growth over the next few years, which will lead to greater flows into the region (including India).

In which segment - large-caps or the mid-and small-caps - do you find more value in at the current levels?

We do not think markets are expensive at an index (S&P BSE Sensex) level. However, there are certain group of stocks which are trading at their all-time high valuation, where one needs to remain cautious and track whether earnings are keeping pace or not.

The small/mid-caps indices have significantly outperformed the large cap index by around 35% in the two-year period and around 70% in the three-year period. We would, therefore, advice lump-sum investors to remain cautious while investing in small-and mid-caps; and one should only do so if one has an investment horizon of two years and above. Systematic investment plan (SIP) investors may continue investing in the small/mid-caps. Within sectors, we see value (selectively) in information technology (IT) and healthcare.

What are your estimates for corporate earnings growth in FY18 and FY19?

We expect corporate earnings growth to average around 18-20% over FY17-19 driven by autos, cement, banks and metals. It would be driven by a mix of consumption and capex by corporate. Lower interest rates, good monsoon, reforms momentum and eventually goods and services tax (GST) bill implementation, may play a part in driving earnings growth. On the other hand, negative surprises in monsoon and inflation could play spoilsport. Higher provisioning by banks (especially state owned banks) could also impact earnings growth.

Which sectors are you overweight and underweight on? Any contrarian bets?

We remain constructive on banking (private and state owned banks), downstream energy, consumer discretionary, cement and gas utilities. We remain cautiously optimistic on healthcare (as a contrarian call).

Is the correction / fall in global commodity prices a cause for worry for the global financial markets? What about India?

Lower commodity prices certainly impact the top line and earnings of commodity and mining companies globally (in-turn impacting global earnings). While lower commodity prices benefits India as it lowers the import bill (India being a net importer of oil and commodities), it may impact the earnings of metal and energy companies as it did between 2014 and 2016. However, with a rebound in global growth, we expect demand to pick up, which will put a floor to commodity prices and eventually lead to reflation.

Banking sector has seen a lot of policy initiatives by the government. What is your assessment and the outlook for the PSU banks in this backdrop?

We remain constructive on the BFSI in general. Within BFSI, we continue to have a tactical view on the state owned banks. For PSU banks, incremental bad loan creation is limited and the process for cleaning up balance sheets has accelerated. The next phase will be of growth. Government’s efforts including the recent banking ordinance to address NPLs in the system should bode well for the sector at large.

Modi government completes three years in office this May. What are your expectations in the remaining tenure as far as policy measures are concerned?

We think the Modi Government has kept its promises and have announced most of the policy reforms highlighted in their election manifesto. The government will now have to focus on execution, which we believe, will meet expectations. We remain very constructive on the Government’s ability and intentions to implement key policy reforms which will further boost GDP growth.