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BW Businessworld

‘Despite Reformed Agendas, Indian Equity Markets Lack Earnings On Assets’

The Indian economy and the reformed agenda are in good shape. Although there are issues around to tackle like non-performing assets for state of banks, says Bill Maldonado of HSBC Global Asset Management.

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Bill Maldonado, CIO Asia Pacific and Global CIO, Equities at HSBC Global Asset Management talks about Indian equity markets and states that earnings have been flat. In an interview with BW Businessworld, he shares his views about Indian and global equity markets and the areas in which they need to grow. Edited excerpts:

What are your views about Indian economy and the market?

The Indian economy and the reformed agenda are in good shape. Although there are issues around to tackle like non-performing assets for state of banks. The Indian market now is neither very cheap nor very expensive compared to two years earlier when most of the equity markets around the world were quite less expensive.

One of the vital things for the Indian market and many other markets around the world is that investor’s need to overview progress on earnings, where the earnings have been flat and even, is slightly declining. At these valuation levels the market is sort of discounting some earnings growth in the near future.

If we don’t see more earnings in the coming years then the market could be very disappointing. Overall, it is a very interesting market with lots of international companies head quartered in India.

What is your perspective about India? What attracted you to enter the Indian market?

I would say that we are very positive on India and the country has a very reform minded government in place. Since it was elected it has been working quite methodically through some fairly major reforms.

We are just about to see the enactment of a major reform known as the GST (Goods and Services Tax) for which the investors have really been hungry for a long time and it is important for the development of the country’s economy to remove the inefficiency to move the goods and services across the country.

The government reform agenda is very strong, the economy is managed very well by the Reserve Bank of India, and the country has made good use of the fall in oil prices to remove subsidies, rebuild foreign exchange reserves and move closer to balancing its budget.

The result of these changes has made the markets function well trading at new highs and there are a lot of things that are positive about the country and as a foreign investor I can say that we have really liked India. When there were changes happening around the world, India since that time has built a self-sufficient and a closed economy and investors have flocked to India because it is a consensus overweight for many investors around the world.

Is HSBC increasing its weights in India?

We’re not increasing our weights in India because we have been overweight in India as of now and we have benefited from that. As new opportunities arrive we can re-position our portfolio to take profits on ideas that have done well and recycle that into new ideas that we see.

We are not adding significant new allocations into India but we are always trying to manage our position, trying to keep it fresh and full of new ideas. India has and always been one of the most favored markets for us and hence we will not increase anymore weights and manage our assets in the country.

What are your views on the global market and what is the reason behind the meteoric rise in the USA market?

Globally we have a situation where everybody was worried about recession last year around May 2016. There was a recession problem in the United States and countries like China, Japan had economic problems. Even Europe as a whole continent was struggling with their economic policies and that overall gave a very negative view about the global market. Equities were very cheap during the same time and we saw a lot of opportunities with equity in developing and developed markets.

Since then we now know that there was no recession and the global economy has continued to strengthen and we move to a situation where we have just small positive growth to stronger growth around the potential growth rate for the economy. For United States it grew by 2 ½ per cent, China grew by 6 ½ per cent, Europe reached 2 per cent and Japan grew by ½ per cent and these are high rates of growth that look like sustaining and building momentum.

As investors saw the global economy, they became much more positive about equities and that’s what drove the equity markets value in the US and around the world. Hence the undervaluation regarding equity markets globally has gone away and the world on average was pretty much mutual with fair values.

Will the decline in oil prices have a bearing on stock prices globally?

Oil has a very interesting story since the last 3 to 4 years and we saw a large supply side driven correction in the oil market which hasn’t happened in a long time. Most of the investors could predict a recession because of high oil prices because they interpret the economic growth based on the demand and supply rate of the commodity.

Currently there has been an imbalance between demand and supply in the market and the supply was exceeding the demand rate which led to a lot of consolidation in that space and a lot of capacity have come out of the market.

We now have a situation where the oil market is much more balanced but the economy is going through a subtle growth. Hence the most likely outcome resulted in having a stable oil price whereas in some cases the prices have gone down in developed markets.