India’s Ahead Among EMs in Recognising Bad Loans
The outlook for emerging markets, including India, doesn’t look very good in the next 6-12 months against a backdrop of tepid global growth, said Paul Danis, chief strategist at Canada-based BCA Research, whose analysis is tracked closely by global fund managers. In an interview to Sanam Mirchandani on the sidelines of a Birla SunLife Mutual Fund event, Danis said he expects China to outperform India as well as emerging markets this year as it is trading at attractive valuations. Edited excerpts:
What is your outlook on India and how do you see it relative to other emerging markets? In absolute terms, we don’t expect much upside in Indian equities in the next 6-12 months because of our cautious stance on emerging markets. We think it is one of the great spots within the emerging market universe because the country is pursuing pro-growth structural reforms. There is a nonperforming loans problem with public sector banks but India is a lot ahead of other emerging markets in terms of acknowledging those nonperforming loan issues. Your concerns about India? We are cautious on India also because of the valuation metrics, which are higher compared to rest of the emerging world and the corporate profit growth has been relatively muted. We don’t see much in terms of credit cycle unfolding in India and so we are relatively cautious on the corporate profit outlook. We do like India from an equity perspective within the emerging market universe and on a long-term horizon because of its very attractive growth profile. It is more because of our cautious stance on the emerging markets over the next 6-12 months that is limiting what we would expect from Indian equities over the same time horizon.
Which would be your top picks in the emerging markets space? India and China would be among the top two certainly. I would put China slightly ahead of India because the former is trading at a deep valuation metrics. We are seeing pretty substantial monetary and fiscal policy stimulus coming out of China, which will result in Chinese equities being a relatively strong performer in the emerging market world. Our house view is positive on China. If the non-performing loan issues are not addressed, there will be some financial market volatility. However, the attractive valuations combined with the cyclical reflationary push by the authorities are likely to support Chinese equities over the next few months.
What is your assessment of the corporate earnings cycle in India? There was a lot of optimism around reform when (Prime Minister Narendra) Modi came to power, but because there were such high expectations, there is bound to be The central banks’ easy money policies have done some good by boosting growth but markets are at a point where further QE or further move into negative interest rate territory aren’t going to do much good. Central banks should start looking for other measures to support growth and inflationary outlook. That is why we are viewing ‘helicopter drop’ options as the next big thing.