India's performance vulnerable to improving Chinese data: Eleswarapu

Eleswarapu states that the growing domestic appetite, which has provided much-needed support for domestic equities, will remain a long-term trend

India’s outperformance this year has further widened the valuation gap with emerging market (EM) peers, says ABHIRAM ELESWARAPU, head of India equities at BNP Paribas. In an email interview with Sundar Sethuraman, Eleswarapu says that the growing domestic appetite, which has provided much-needed support for domestic equities, will remain a long-term trend. Edited excerpts:

What factors enabled the broad-based rally in Indian equity markets this year?
 

Investors turned positive on India early this year after the time correction seen in 2022 and macroeconomic (macro) developments that enhanced India’s relative attractiveness within EMs. This led to a strong positive reversal in foreign flows, even as domestic participation remained resilient.
 

Softening crude oil and commodity costs, along with resilient corporate earnings, were further catalysts.
 

Inflationary pressures eased through most of the year, and global central banks, including the Reserve Bank of India, have indicated a pause to the rate-hike cycle. Bond yields have also remained quite resilient in India compared to other markets.
 

What is the risk for equity markets on account of the situation in West Asia? Do you expect it to snowball into a wider regional conflict?
 

Geopolitical events affect equity markets through two channels: flight for safety and oil shocks, given the issue’s relation to West Asia.
 

On the first channel, the outlook is still relatively benign, as positioning is light, and portfolio derisking may not have a large impact. On the second channel, despite the issues in West Asia, crude oil prices are slightly lower compared to about a month ago, and so far, we haven’t seen any major direct implications for Indian equities.
 

The extreme scenario of triple-digit oil prices and derailed demand seems like a low-probability event to us.
 

Has domestic money made it difficult for Indian equity markets to fall beyond a point? Do you expect the domestic investor bullishness to continue going forward?
 

Domestic inflows have remained robust over the past couple of years, providing much-needed support during foreign outflows. While occasional volatility may occur, a growing domestic appetite for equities is expected to remain a long-term trend.
 

Changes in the taxation of insurance, bond mutual funds, and foreign equities have increased the relative attractiveness of equities, especially for those in the high-income-tax bracket, contributing to robust domestic institutional flows.
 

How do Indian markets look vis-à-vis other EM and regional peers?
 

India currently trades at 18.5 times forward earnings, in line with its historical average but at a premium to other EMs and regional peers.
 

India’s outperformance in calendar year 2023 has further widened the gap and is attributable to robust macro fundamentals and resilient earnings
.

Investors see India as a structural story, but there is also a general acceptance that our market has disproportionately benefited at the expense of other EMs.
 

How much has the Indian market benefited from China’s aversion? Will India underperform or lose favour once China is back on investor radar?
 

At the start of the year, India saw some diversion of foreign flows in anticipation of a strong economic recovery in China after its reopening. However, that did not quite play out as expected. It is reasonable to expect that India will continue to remain firmly on investor radar, but there could be some underperformance if Chinese data starts to improve.
 

What are your thoughts on the US Federal Reserve’s (Fed’s) last policy announcement? Have we come to the end of the rate-hiking cycle?
 

The September Federal Open Market Committee minutes showed that after hiking by 525 basis points, Fed officials see risks as increasingly balanced following several quarters of an almost single-minded focus on inflation. While the minutes kept open the possibility of further hikes, they simultaneously showed a committee receptive to the prospect that the current monetary policy stance is sufficiently restrictive.
 

Our view remains that the Fed will hold rates steady through the balance of the year, with the first cut of the cycle likely to be in June 2024 as a sustained improvement in inflation dynamics becomes more broadly evident.
 

How significant is the risk posed by the general election? Do electoral outcomes have a lasting impact on market performance beyond short-term turbulence? What other domestic challenges are in play?
 

Elections tend to pose some near-term volatility, but history tells us that they rarely dictate the markets over the long term.

While the domestic economy has largely become resilient, a recovery in rural markets is yet to play out and remains a key monitorable.