‘As long as rates can decline, valuations not a major risk’

Global equity markets have had a good run in the past few months despite events like Brexit and an uptick in commodity prices. HERALD VAN DER LINDE, head of equity strategy for Asia-Pacific at HSBC, tells Puneet Wadhwa that any new evidence that would make a rate rise in the US in 2016 would be a key risk for the market rally. Edited excerpts: Do you think the returns from equity as an asset class could be minimal over the next two years, as Europe prepares for Brexit amid slowing global growth and the possibility of a rate hike by the US Federal Reserve? It is always possible that equity returns are negative in one given year. Often, this is because valuations decline from high levels or negative earnings growth in a market or region. In Asia, both these two risks are low. How does India stack up against its Asian and emerging market (EM) peers amid all this? India grows faster but is also more expensive. It is also more defensive. In time, when cyclical markets and low price-to-earnings (PE) markets outperform, as it did in the past few months, India can underperform. But, given the improving growth outlook in India and when compared to other EMs, the outlook for positive equity returns is good. As long as Indian interest rates can decline, high valuations are not a major risk. Which regions are you overweight and underweight on? We like India and selected Asean countries such as Indonesia. We are overweight on EM in a global context, and the US. Our underweights include Europe. What are the key risks to the rally in global equity markets? New evidence that would make a rate rise in the US in 2016 more likely would be a key risk. Weakness in China's economy could be a key risk for the EM universe. How are the corporate earnings in the Asian and the Indian context shaping up against expectations? It appears that Asian earnings, and India is not an exception to this, were overly optimistic at the start of the year. Throughout the first half of the year, we saw earnings downgrades in a wide range of markets. It now appears this is coming to an end. We are at the bottom of the earnings downgrade cycle in Asia and, it appears, in India as well.

The latest earnings growth forecast for India are 13.6 per cent for 2016 and 18.4 per cent for 2017. We like rural oriented sectors, especially in the consumer space. We don't see the need to change this strategy because if we would so, we would have to change our view. How are the foreign investors looking at India as an investment destination now? What more would you like to see from the government in its remaining tenure? In general, foreigners believe that the overall reform has disappointed the sky-high expectations of two years ago. Progress on the GST (goods and services tax) is encouraging, although the details and implementation will need to be scrutinised in the future as well.