Too early to say whether the worst is over or yet to come: Ritu Arora

Ritu Arora, Asia CEO & CIO, Allianz Investment Management Singapore says her expectation of Indian earnings at a compound annual growth rate is 8-12 per cent

After a healthy run in July, the markets seem to be consolidating and are likely to react to the ongoing June quarter earnings of India Inc. RITU ARORA, Asia chief executive officer and chief information officer, Allianz Investment Management Singapore, in conversation with Puneet Wadhwa, says her expectation of Indian earnings at a compound annual growth rate (CAGR) is 8-12 per cent. Edited excerpts:

Is it safe to say the worst is over for global financial markets? 

We are currently in the midst of a rate-hiking cycle that has started recently, and arguably in a belated fashion. It is too early to say whether the worst is over or yet to come. While global markets, especially risk assets, have recovered from their lows, some of the key areas of concern include inflation evolution and central bank reaction, especially in the US, China property sector slowdown and its wider contagion, and geopolitical challenges such as Russia’s invasion of Ukraine and its second-order effects. Any of those risks intensifying may reignite downward pressure on global markets, but lower valuations can mitigate some of this.

Has shopping for investment-worthy stocks become more difficult now?

For 2022, our focus has been on improving the quality of our portfolios. With yields having moved up substantially over the past few months, there is neither the need nor the time to reach for yields. Over the past few months, the geopolitical overlay has become quite important, as has the sovereign risk overlay. Thus, it would be fair to say that allocating assets has become more challenging. That said, on an overall basis, our focus on being a liability-driven investor has meant our portfolios are relative beneficiaries of the current increase in rates, offering improved long-term return prospects.

Do you think global central banks will cut the quantum of rate hikes over the next few months?

Given that the hiking cycle has started a little later than ideal and the high inflation overshoot versus the long-term target of about 2 per cent, it is expected that the hiking stance will continue. A decrease in the quantum of hikes is a possibility, depending on incoming data.

What’s your view on Indian equity markets?

India is one of the rare emerging markets (EMs) to have delivered robust total returns. The Nifty 10-year and 20-year CAGR have been 9.5 per cent and 14.1 per cent, respectively, in US dollar terms. This is due to a confluence of factors like a demographic supercycle, knowledge-based human capital, wide-ranging reforms, and strong high-quality corporates, among others. Together, we call this the ‘India growth story’.

That said, rising interest rates in the US do tend to accentuate problems in EMs. We are currently seeing this playing out across India’s neighbourhood. While India itself is on solid footing, the broader negative impression of EMs is likely to provide better opportunities for making entries.

We are in an environment where one can afford to wait for the right price instead of having to chase after stocks.

Our preference remains for bottom-up selection in high-quality names with pricing power. In terms of sectors, this translates into consumer, automotive, and financial.

Have foreign institutional investors actually ‘oversold’ India?

While it is true that foreign portfolio investor ownership has fallen to 10-year lows, the decline is from around 20 per cent levels to only about 18 per cent of the BSE 500 ownership. Further, this needs to be viewed in conjunction with global interest rates that are following the greatest inflation increase since the 1980s.

In addition, we have an evolving geopolitical situation. Hence, there is flight to perceived safety. Domestic institutions and retail investors have pitched in with increased ownership, which is a sign of healthy market participation. The current situation can prevail until the global risk sentiment changes.

What's your estimate for corporate earnings growth in 2022-23 (FY23) and beyond?

As long-term investors, we look beyond quarterly earnings, although the guidance and numbers reported so far have been resilient. Equity is a risk asset and near-term volatility is a given, especially in the backdrop of rising global interest rates. From a long-term strategic asset allocation perspective, our expectation of India earnings growth CAGR is a range of 8-12 per cent.

Do you expect policymakers in India to roll out more stimulus measures in FY23 to help the economy?

We expect the monetary and fiscal policies to remain contractionary over the next few months. The Reserve Bank of India is hiking policy rates to get inflation within its stated target range of 2-6 per cent. Fiscal policy is constrained due to rising twin deficits - partly due to second-order effects of ongoing geopolitical developments. Macroeconomic stability and central bank credibility are far more important than stimulus at this point in time.