What is the mood in the Asian markets? Are we in a difficult December?
As far as the entire Asian markets are concerned, the sense of caution is quite evident in the type of price action we are seeing. The latest operator, of course, is the new variant of Covid. But having said that, various markets have been on a downtrend except for some pockets in Southeast Asia for various reasons.
In the case of India, it was more about the perceived valuation for the region and some sharply corrected recent technology IPOs. That added fuel to that fire. In the case of North Asia, the concern was regulatory pressures in China and excessive influence that led to some contagion across the region. Also in the case of other large markets such as Korea and Taiwan, there was concern that demand growth in the developed market would take a rest and put pressure on the prices of devices and memory with the semiconductor technology that were driving these markets.
So basically, there have been a lot of variables that investors are now having to play with, and as a result, it looks like in the near term, that level of volatility will continue.
Let’s assume for a minute that the news on the virus front isn’t scary. It is controlled and controlled. What happens next for a market like India?
As far as India is concerned, it started even before this new type of Covid emerged and that concern hasn’t really gone away yet. India started correcting somewhere around mid-October and the main reason behind this was the very high valuation premium it was enjoying at the time, around 90% in terms of price-to-earnings compared to its Asian counterparts. This assessment gap has decreased slightly. It’s probably at around 60% right now. But even this is well above the long-term average by about 30% to 35%.
India always trades at a premium due to the relatively high return on capital and return on equity that the companies generate but the premium is seen as probably too high at present. This may go on for some time but as a result of this 8% correction we’ve seen, some sectors and stocks have corrected a lot and may show some value there. It’s hard to say whether investors realize this value right now and are trying to grab the knife of the proverbial downfall, but in the long run, investors may actually start looking at those sectors and stocks that have corrected more than the market.
India’s outperformance, which has been going on since last year, has largely been a straight line up. We have not seen small corrections. Do you think those days are over as some warning sounds came?
Those straight line rallies are always a bit scary because after all, we’re talking about stock markets and choppy narratives on different fronts always lead to some degree of volatility in relation to asset prices and these choppy narratives have originated from quite a few. Resources.
Over the past three to six months, there has been concern about the pace of tapering or even sometime interest rate increase by global central banks. Although the Fed has clarified the exact pace of tapering, investors still wrestle with the question of whether there will be some degree of tightening by central banks at some point. Covid is an ongoing fluctuating narrative that we’ve had to deal with over the past couple of years and it looks like we’ll have to deal with it over the next year or so as well.
In this context, when news flows are choppy, when investors are still grappling with the implications of news flows on asset markets, this straight-line rally has been a cause for concern, particularly when it led to the type of valuation. The insurance premiums we’ve seen.
So from now on, investors will pay more attention to the ratings of the things they buy. Second, it is actually estimated earnings increases that are likely to be closely watched across sectors because we made this point that earnings estimates and currency are the two strongest variables influencing stock price asset prices. These two variables will be closely monitored.
It looks like you’re still overweight in India but you’re moving forward with recent corrections, what are the chances of you buying?
I would say that there are some buying opportunities in the banking sector. We think some banks are likely to see some kind of recovery in loan growth. It may not be at the moment, but perhaps in the second half of 2022, even concerns about asset quality will diminish.
It’s a combination of several drivers because a lot of those loans were actually to sectors that were over-indebted but those sectors that are over-indebted have really rebounded recently. I’m talking about commodities, minerals, mining, industries and even real estate. I think the decline in asset quality concerns and the improvement in sentiment around loan growth is driven by both depreciation and weighted investment The cycle could outperform the bank especially as the universe gets interesting after the last correction.
I would also note that some clusters, energy or related connections would also work well. Telecom sector has different drives. We’ve been talking about consolidation in the sector leading to higher tariffs, but both pure firms and conglomerates in energy, telecoms, etc. may have a decent path open to them in the medium term.
Third, I would also point out to the IT sector, if at some point we’re trying to hedge against a weak rupee and when we combine that with the strong news flow about new orders that have come towards front-line IT names, that’s one of the sectors that could become attractive. investors at some point. These are some of the sectors that investors should pay attention to.