Overweight on Indian Stock Market

On recent correction in markets: Our View is that this is a dip to be bought. When we look at the main drivers of this bull markets which clearly has been very strong year to date , it is all really about earnings and in turn the synchronised global economy we are experiencing and we actually raised our earnings forecasts about two weeks ago for the braoder EM universe.

On earnings growth: The overall trajectory of earnings going forward is going to be a pretty rapid acceleration from here and our team on the ground think they see some early signs of that in industrial and consumer space. So yes, it is certainly true that within that earnings growth story we have had year to date, it has been more led by North Asia, by China, Taiwan and Korea.

We are also monitoring the valuations in India. We are back on consensus, about 18 times forward for India, so that is about one standard deviation above EM. But we sustained those kinds of valuations in the past and I think that the domestic flows story remains very powerful in India and that does improve current account and fiscal position which in turn is keeping interest rates and inflation quite subdued and so, that is kind of a supportive part of the story for the multiple in India.

Is there a risk for India that if earnings do not pick: We would be surprised if we did not see the earnings coming through. Our economist is very resolute on the positive macro outlook for India. So, we would be surprised. If the earnings do not come through then the valuation would become more of a problem, but we have been overweight India all year, it is one of the top performing markets in EM. It is slightly lagging China, but way ahead of some other markets in Association of Southeast Asian Nations (ASEAN) or Australia and we are happy to remain overweight India here.

One of the strong features for the market this year, of course, is that the rupee has been strong against the dollar when every year, the appreciating sense for the dollar, but that is one of the attractive features. Not all emerging currencies have that characteristic. They have not all closed out some of these major macro imbalances particularly South Africa and Brazil have more question marks over their currencies. So, lower inflation maybe means lower nominal rupee earnings growth. But actually for the global investor, the nominal dollar earnings growth you are getting from corporate India is actually improved significantly.

Are you still backing the consumption play? Yes, and I think it is related to what we touched on earlier in terms of the ability for the consumers to take on more leverage in India as one of the last stories in EM where you have not really had a leveraging up of the consumer. So, yes that is important.

Regionally, we like financials and that certainly applies to the private sector banks in India and regionally we like IT stocks, but that is much more focused on North Asia, tech hardware and semis, plus the China e-commerce names.