Midcaps to outperform, India still cheap relative to its history and to US
Mark Matthews, Julius Baer
Mar 24, 2017 | Source: ET Now
The election result makes it much easier for foreigners to take a sanguine view on India and we can see looking at the net foreign equity inflows into the country that they are really accelerated since the election and there was a big selloff after demonetisation. So I think there has been a real change in sentiment toward the country that when I look at the chart of inflows, I see they are really just beginning.
Indian markets valuation: I guess it all depends how you qualify cheap. It is certainly not cheap relative to the Chinese market. India is on about 15 times and China is on around 10 times but it is cheap compared to the US which is on 20 times. And, of course, you have to look at the earnings growth and this is where the upside surprise is going to come from this year that after three years of no earnings growth, you are probably going to have earnings growth of an excess of 20% and large part of that will be a base effect from the banks and the commodities. But you are also starting to see and we were seeing it from before demonetisation a pickup in investments and in construction activity. So, you are right and relative to its history and relative to the US, we could call India cheap.
Do you think the bulls are here to stay or now we are approaching that frontier so to speak? There are all kinds of numbers you can look at to suggest that the market should not go up any more. For example, the price to sales ratio of the Dow industrials have eclipsed two times which it never did before and the Snapchat IPO is very reminiscent of the dot com bubble of 17 years ago. But it can go higher because a), the earnings are starting to accelerate in the United States. We saw that clearly in the most recent quarterly earnings and they beat expectations quite handsomely. b) sentiment in the US is improving significantly.
Indian Markets: It is probably across the board except in the consumer sector. The consumer sector in India is going through a bit of tough patch now but otherwise in banks, commodities and cyclical companies there is good value. In midcaps, you are going to see outperformance because the domestic mutual funds tend to focus there and earlier foreigners were buying but since demonetisation, domestic institutions have also registered large net inflows and that should also continue. So midcaps probably will outperform.