India Can Give Returns of up to 30% This Year
Indian markets could return 30% in 2016, said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management. In an interview to Sanam Mirchandani, Jacobsen said India is his favourite market from a valuation perspective and also because the downside from current levels is limited. Edited excerpts:
Where does India stand in your emerging markets (EMs) list? The two countries that stand out as very good investment possibilities are Greece and India. From a valuation perspective, Greece is very cheap but they will continue to have issues as they approach their June and July deadline for making certain debt repayments. India is my favourite from a valuation perspective and from a margin of safety. In India, the downside is a lot more limited as the fundamentals are very supportive. Sentiment is beginning to change for emerging markets in general and people are going to be looking at India as a bellwether for how emerging markets will be doing.
What kind of returns do you expect from India in 2016? We will probably see about 30% returns. A lot of it will depend upon fund flows from developed market investors. For that to happen, commodity prices have to stabilise and the Federal Reserve should not be too aggressive and hasty in hiking rates. If these factors pan out, we could see a significant re-pricing of Indian equities. For EMs as a whole, we expect about 20% returns.
What are the key triggers for Indian markets going ahead? We have already made it through the Budget process and a lot of people were encouraged by the fact that the deficit wasn’t too large. The regional elections would be an important factor to watch. I would like to see the BJP getting a bit more support to help underscore that the public is going to endorse PM Narendra Modi’s reform agenda such as Make in India. Also, if there is a better monsoon this year, it should be good for growth.
INDIA OVER GREECE
What themes do you like In India? One area that I like is infrastructure. The Make in India reform agenda will involve improving roads, bridges, sanitation and electrical systems and I would look at sectors that are likely to profit from the projects. Another area I like is sectors catering to the rural community. There is a big divide in incomes and wealth between urban and rural population. The rural population represents vast, untapped potential for growth.
Do you expect flows into EMs to be stable going forward? In April, one of the things that has hurt global markets is the yen. There are concerns about whether the slowdown in Japan will spin out of control. The flows are going to continue to be volatile during April, and possibly May. The trend could turn quickly if we see the Fed deciding to not hike and the Bank of Japan does more on the monetary stimulus front.
Do you believe headwinds from China are over? China is turning into a tailwind for the markets as opposed to a headwind. At the beginning of the G20 meeting, the Governor of the People’s Bank of China started communicating more about what they were trying to accomplish with their monetary policy and that was a very positive step. The monetary and fiscal stimulus that they have implemented is begin- ning to bear fruit and China could become a support to market as opposed to a overhang on the market.
What do you make of the US Fed’s commentary on rates? The FOMC minutes showed that there is a divide within the Fed but the majority block led by chair is the one that is ultimately going to have the say about when they hike again. It is not a divide that will push the Fed to hike sooner than what Janet Yellen would otherwise like.
When will US increase rates next? We could see a hike in June. The headwinds that were very well enumerated and spelled out in the FOMC minutes could abate or lessen by the time we get to the June meeting. A key consideration could be whether or not the dollar continues to strengthen and if oil stabilises. If oil stays in that $35 to $45 per barrelrange, the Fed would get a little bit more comfortable hiking rates.