India top bet among Asia, global EM equities: Herald van der Linde

Mumbai: India is the top bet among Asian and global emerging market equities, Herald van der Linde, head of equity strategy for Asia-Pacific at HSBC said on Wednesday, citing attractive valuations and a strong domestic story.

Linde, known as “The Flying Dutchman” is among the most optimistic among foreign brokers on India’s equity prospects with a 2017 target of 30,500 for Sensex.

On Wednesday, BSE’s 30-share Sensex closed 0.90% higher at 27,140.41 points.

Linde said lower export dependence and reasonable valuations are factors working in favour of Asia’s third-largest economy.

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“India has a very large domestic component. It is not so export dependent as other markets,” Linde said on the phone from Hong Kong.

“I think demonetization is pretty much now finished. From what I understand so far is that it is not unreasonable to expect people to go back to normal lives in the next couple of weeks,” he said, referring to the 8 November ban on Rs500 and Rs1,000 banknotes.

“India has an amazing ability to deal with difficult circumstances. I think there is a word for it—jugaad. If things don’t work, they always find a way around it,” added Linde.

He rates the Narendra Modi government at an 8/10 on reforms deliveries so far.

“I would say, generally speaking, Mr. Modi has been willing to take grave and bold decisions,” said Linde.

“I would go for a high score.”

The recent sharp correction propelled by demonetization and a stronger dollar may have made India’s valuations attractive.

“The third reason why we like India is valuations. India is not expensive,” he said.

The benchmark BSE Sensex currently trades at 18.94 times one-year forward price to earnings (P/E) ratio, as compared to 18.31 times at close on 8 November.

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Linde’s next two favourite bets in Asia are Indonesia and China. In comparison to India, he believes China looks relatively expensive.

“Valuations are not attractive. Secondly, there is risk to China, with regards to the export sector, which is much more than India,” Linde said, referring to Chinese equities.

Linde places his bets on Indian banks at this point of time, followed by the consumer-focused sectors.

BSE’s Sensex’s premium to MSCI EM index, has been shrinking of late. Sensex currently trades at 18.94 times one-year forward earnings, a 56.6% premium as compared with MSCI EM Index, which trades at 12.09 times 1-year forward earnings.

At the start of 2016, Sensex traded at 17.98 times one-year forward P/E, commanding a premium of 58.69% on MSCI EM Index which traded 11.33 times one-year forward earnings then.

“There was a lot of euphoria post Modi being elected and valuations were very high at that time. So, that has normalized. Secondly, the profitability in India is bit on a decline,” Linde said, explaining the narrowing of such premium.

While demonetisation and upcoming implementation of the goods and services tax would hurt growth in the near term, they would reap benefits over a longer horizon, Linde believes.

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“It is near-term pain we have to take. The benefits of these are big in the long term,” he said.

On Donald Trump winning the presidential election in the US, Linde drew an analogy with Narendra Modi and Shinzo Abe coming to power in India and Japan respectively.

“Mr Modi, Mr. Trump and Mr. Abe, they have all come in with an agenda, to change things,” said Linde, explaining that there were three phases: the initial euphoria, the flat line, and the next move, which depends on how good or bad the performance turns out.

On Indian banks, Linde said, “There is a very good value emerging in that sector,” adding that the sector had seen a derating, and was geared up for a recovery after the demonetisation impact wore off.

Linde said that the consumer-themed stocks also looked good post the sharp correction since demonetisation.

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