Tough for India to replicate the outperformance over EMs: Manish Gunwani

We have relatively strong growth and a healthy corporate earnings cycle as positives, but a worrisome current account deficit and high inflation as challenges, says Manish Gunwani.

It has been a choppy week for markets as they absorbed the outcome of the Jackson Hole symposium amid other global and domestic cues. MANISH GUNWANI, chief investment officer for equities at Nippon India Mutual Fund, in conversation with Puneet Wadhwa says it will be difficult for India to replicate the outperformance over emerging markets (EMs) in the last few quarters. Edited excerpts:

Did global equity markets celebrate the possibility of a fall in inflation and softer central bank policies too soon?
 

It does look like after a stiff correction in most assets globally in the first half of this calendar year, stability in bond yields and inflation peaking out had brought some relief to the markets. While inflation is likely to descend from the current levels, given the extent of negative real rates in developed economies and asset inflation remaining healthy, there is a good chance that monetary tightening will continue for quite some time.

How do you see Indian markets play out over the next six months in this backdrop? Can Indian equities outperform global peers in any correction and subsequent recovery?
 

The Indian market has been the one-eyed king in the land of the blind in 2022, outperforming most major markets. We have relatively strong growth and a healthy corporate earnings cycle as positives, but a worrisome current account deficit and high inflation as challenges.

Both the Indian stock market and currency have significantly outperformed EMs in general. This high base may mean that further material outperformance is difficult in the near term. In the long-term, fundamentals of the Indian economy are much more attractive than most EMs.

How can investors in India play the ‘China slowdown’ theme? Is that a major worry for global financial markets - and to what extent is that priced in?
 

The slowdown in China is bad for global growth, but not as bad for India as it has been a headwind for commodity prices, especially energy. The slowdown in China is broadly priced in by markets, but the tail risk could be if the yuan was to undergo a disorderly depreciation, which would then transmit to other EM currencies. At this point in time, we are not seeing signs of this.

What’s the road ahead for foreign and domestic flows into Indian equity markets? Do you see domestic institutional investors and retail investors who bought at lower levels sell once the markets recover more?
 

It will be difficult for India to replicate the outperformance over EMs in the last few quarters. Therefore, foreign institutional investor (FII) flow into India should broadly depend on flows into EMs in general – and this in turn typically depends a lot on dollar strength. If the dollar was to appreciate, it is unlikely that FII flows into India will be positive. There seems to be a pattern wherein flows by domestic and FII investors gather strength by turns; so if FII inflows increase, it is likely that domestic investors will book profits.

Has pressure on corporate earnings been more pronounced in the April-June quarter, compared to what markets expected? Which are your overweight and underweight sectors?
 

Actually, corporate earnings have largely been in line with expectations as a bit of global growth slowdown and pressure on margins due to high commodity prices were built in. We prefer domestic-facing companies, compared to global exposure, as Europe and China are already in slowdown mode and the US economy is expected to slow down as well, given tightening monetary conditions.

Some themes we like are banks with low price-to-book valuation, outdoor consumption segments like hotels, beverages, etc, select industrials, and automotive stocks.

Information technology (IT) companies now seem to be going slow on hikes. Can companies in the rest of the sectors follow suit?

If there is a global slowdown, we do expect many sectors like IT services to be affected – some more directly than others. If the slowdown is severe, it can have an impact on domestic consumption, but there are lots of products and services in this space that have massive under-penetration and may continue to grow even in challenging times.

What is the one investment strategy that has worked well for you so far this year, and the one that was a total miss?

Our exposure to outdoor consumption across retailing, hotels, beverages, etc has done well this year, whereas exposure to some insurance and pharmaceutical stocks has hurt us.

When do you see the primary markets revving up?
 

There is a reasonable appetite for good issues in the primary market today. However, compared to a year ago, the liquidity is tighter and we expect this to last for a few more quarters at least.