Deutsche Bank’s head of Asia-Pacific equity strategy, William Stephens, believes that concerns over trade wars are overdone. From a regional perspective, he reckons that the upcoming elections in India are the single most political event for emerging market (EM) equities. Stock valuations for India have now returned closer to historical valuation range and India could post among the strongest earnings growth in the region. Edited excerpts from an interview: 

Views on trade wars: Mr. William Stephen, Head-Equity Strategy Asia Pacific at Deutsche Bank says, the market's concerns over the trade war are overdone. In view of Deutsche Bank team’s view, potential China and global slowdowns were bigger drivers of poor performance in Asian equity markets in 2018. Stock markets aren't always representative of their underlying economies, and this is even truer when it comes to trade. For example, we estimate that the Chinese stock market (MSCI China) has less than 2% revenue exposure to the US. Going forward, Mr. William’s team is relatively sanguine on the outlook for the trade war. The market seems to be expecting a more positive outcome, especially in recent weeks. In fact, trade war-exposed stocks have outperformed the broader Asian market since December 2018. 

On whether worst is over for China in terms of an economic slowdown: While China may be in a longer-term structural slowdown, the authorities still have a significant number of tools at their disposal. Concerns about a China slowdown likely peaked in late 2018 and appear to be improving of late. In fact, the largest inflows have been observed in Chinese A-share market on record in the first two months of 2019, with overseas investors buying $20 billion of Chinese stocks through the Stock Connect programme.  Deutsche Bank’s Equity Strategy teams’ discussions with investors indicate that the market expects a strong and effective stimulus programme to offset any slowdown. While it may not be that simple in practice, signs of this have already been seen as a strong pick up is observed in credit and total social financing in 2019.  We have also seen announcements relating to reducing taxes, which should also be positive for sentiment.  

On India market being laggard in terms of performance despite favourable domestic macro conditions: Deutsche Bank’s Head of Asia Pacific Equity Strategy says, from a regional perspective, his team has been neutral to India. Despite having strong earnings prospects, the market looked expensive relative to its own history as well as the valuation of other regional markets. With valuations having declined back down towards their longer term averages, the team is seeing some renewed interest in the market. That said international investors remain somewhat cautious ahead of the elections. The elections have historically been significant volatility events for the market and whether we get a strong majority or weaker coalition, the outcome will be a significant determinant of market performance, based on what we has been noted around previous elections. The recent pick-up in political tensions with Pakistan has also probably clouded investors’ outlook somewhat. 

At the stock level, the recent Q3FY19 results season likely didn't provide much of a positive catalyst: We estimate that Indian companies’ net missed analyst earnings expectations. For EM investors, China's growth slowdown and subsequent stimulus have been a huge focus and this may have taken up a lot of the “air” in the EM space. Many of the worst performing markets of last year, such as China and Korea, have been leading the recent rebound. Indian stocks outperformed on a relative basis for 2018, so there may be an element of performance mean reversion at work. Another headwind could be the upcoming increase of weight for China A-shares in international benchmarks, which will see benchmark portfolios re-allocate out of markets such as Korea and India and into China. 

On Indian General Elections and impact on equities: The Head of Deutsche Bank’s Asia-Pacific Equity strategy views the Indian elections as the most important single political event for EM equities. According to him, Indian Elections have historically had a huge impact on market returns, volatility and relative sector performance. Typically, significant regime shift in volatility is observes. However, a notable exception to this was the 2014 general election. The historical pattern around previous elections has featured a strong run up to the elections, followed by significant divergence depending on the election outcome. On average, the Sensex has delivered nearly 11% in the 6 month lead-up to the past eight elections. Strong majority results were greeted with 33% on average in the 6 month window after the event, while low margin results led to only 0.5% returns. From a positioning perspective, decisive elections are typically met with a "risk on" stance, while a non-majority scenario is typically associated with a more defensive posture. The upcoming elections are sure to bring international investors’ attention back to India and may act as a catalyst to move the market out of its recent sideways trading range. 

On Indian corporate earnings growth and valuations: Historically, Indian valuations have been relatively high given the strong growth outlook for the market. That said, India valuations got up towards the higher end of their historical range in the middle of last year, which probably indicates why India has lagged its Asian peers in recent months in term of returns. At around 17x earnings, Mr. Stephen’s sees the market at the 61st and 80th percentiles of the 5 and 10-year valuation range, so it has now returned closer to historical valuation range. Indian earnings expectations have been relatively robust compared to other markets and the team at Deutsche Bank expects it to post among the strongest earnings growth in the region.