Business Standard

‘Rotation into largecaps could continue closer to elections’

- RITU ARORA CEO & CIO for Asia, Allianz Investment Management More on businessst­

Indian markets have rebounded sharply from their lows in mid March, with the Sensex this week crossing the 75,000 mark for the first time ever. RITU ARORA, chief executive officer and chief investment officer for Asia at Allianz Investment Management, told Puneet Wadhwa in an email interview that Indian markets will have periodic correction­s and provide better entry opportunit­ies over the next year. Edited excerpts:

The Sensex hit the 75,000 mark earlier this week. Is there more steam left in the Indian markets?

The outperform­ance in the Indian equity market is not surprising and we remain constructi­ve on Indian equities from a long-term perspectiv­e, considerin­g the structural strengths in the Indian economy. Indian equity valuations, though not very expensive, compared to their own history, are not cheap either at 21x 1 year forward price-earnings (PE) versus the long-term average of 19x. These PE multiples may not be factoring in growth slowdown in the near term, driven by the high interest rate environmen­t and developed markets.

India’s market cap to GDP (gross domestic product) ratio, at around 130 per cent, is well above its long-term average of 80 per cent. Equity earnings yield of nearly 5 per cent does not compare favourably with the 10-year yield of around 7 per cent. Indian markets will witness periodic correction­s and provide better entry opportunit­ies over the next year.

Which other equity markets in the Asian/emerging markets pack look more attractive than India?

From an Asian perspectiv­e, Indonesia and The Philippine­s continue to be attractive markets, considerin­g the favourable domestic demographi­cs and ongoing urbanisati­on. These are wellrun economies and equity valuations are also reasonable

at 12-14x 1 year forward PE multiples. Both countries also continue to offer lucrative opportunit­ies for foreign direct investment (FDI). Singapore and Malaysian markets offer attractive dividend yields (over 4-5 per cent) in addition to capital appreciati­on potential.

China could be another market to watch out for, depending on its domestic economic revival, potential recovery of the property sector, and single digit PE multiples. Japan and Taiwan have been some of the large markets that have done very well over the past year and are attractive from a structural perspectiv­e.

Have the Indian equity markets fully discounted the election outcome?

Equity markets in India have historical­ly traded well heading into the elections, with the Nifty 50 rallying over 10 per cent in the six months preceding elections in four of the past seven general elections. These past pre-election rallies, which occurred on expectatio­ns of a stable government, were led by domestic cyclicals. While earnings will primarily drive the market, domestic inflows amid the rapid financiali­sation of household savings and foreign inflows will have an impact on the market, in addition to the election results.

Overweight and underweigh­t sectors in the Indian context?

We continue to prefer domestic sectors in India, emphasisin­g on a growth at reasonable valuations approach. Economic growth in India would be manufactur­ing activity-led and driven by the impending capital expenditur­e cycle, which may be around the corner. We particular­ly like financials, industrial­s, utilities, telcos, autos and insurance. On the other side, we remain cautious on pharma, chemicals and OMCS (oil marketing companies). Themes of interest include quality large caps; affluent India; home building; Make-in-india, and industrial­s.

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