Investors finding other EMs cheaper

While global markets are roiled every day on fears of Chinese slowdown and further yuan depreciation, investors are on a bargain hunting spree. Speaking to Bloomberg TV, Kotak Institutional Equities senior executive director and co-head Sanjeev Prasad says a lot of investors who were focusing on Indian companies are trying to find bargains in similar firms in South Africa and Turkey as they are trading much cheaper.

Lot of this correction is led by global factors and it is slightly tricky to get a handle on those. At this point of time, it looks like there is no faith in emerging markets—people haven’t really made any money in the emerging markets for a long period of time. Today we have the China factor, which is making things very uncertain with respect to the authorities’ ability to manage the transition over there from a more controlled economy to a more market-driven, market-oriented economy. There is a fair bit of fear about potential depreciation of the currency in China, which adds to the problems of the emerging market in the sense that if China depreciates either willingly or otherwise, then every other emerging market has to follow suit which is not a good news for the investors. So that is one big overarching theme at this point in time. And the related problem as far as India is concerned is that even though India’s macro fundamentals look very good, the problem is the valuation is looking high compared to other emerging markets. Lot of investors tells me now they have started to look at other emerging markets and trying to find bargains over there. Similar companies in South Africa and Turkey are trading at a much cheaper valuation as compared to their counterparts in the Indian markets. So the worry is you could see some funding happening out of India. India is still quite overweight in the emerging markets basket for investors. Coming to India, we are thankfully off to a good quarter as far as earnings numbers are concerned and so far no major company disappointed. Earning numbers are beating the consensus estimates, which is a good thing. But there are still concerns about the further earnings downgrades. At least for the first two quarters, there could be some more downgrades of this calendar year and then things will start stabilising. If we look at our numbers, we are looking at 19 per cent growth for Nifty for the next year that is March 2017 as the base for the markets that are quite low. You can potentially see another 4-5 per cent cut in earning numbers. So the first thing is earning number should find some bottom and if they translate that into valuation currently the Nifty Fifty is trading at about 15 times, which looks decently valued. I don’t see much of a trigger for the market. If things continue to worsen globally, maybe the fall could be another 3-4 per cent from where we are. So I think you take 7,000 as the downside (for the Nifty) for the time being.

The banking sector is tricky one and is hard to get a handle on the earning numbers. If you look at the Axis Bank numbers, there was a lot of concern in the Street based on fears over higher loan loss provisions in the current quarter. But the management has come out and said categorically several times that that they have more or less complied with the RBI’s directive on recognition of NPAs and numbers are still on the lower side. If there is confidence in the Street that the banking numbers will not be as bad as what is being made out few days back, then I think you will start seeing some confidence in the banking stocks. But you don’t know how much more of the pain has to be recognized.

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