With the economic growth turning relatively strong across the world, the equity market valuations may remain relatively more stable in 2014 compared to last year despite the commencement US Fed tapering believes Manishi Raychaudhuri, Asia-Pacific Strategist, BNP Paribas Securities. In an interview with Devangi Gandhi, he says that even as the RoE of Indian market may improve along with its Asian peers, the current market valuations may already be discounting this rise.
The US Fed has finally commenced on its tapering exercise. What would be its impact on EM equities given that this move was expected since last six months?
We believe US authorities have significant degree of certainty about the sustainability of the growth recovery, now that they have started QE tapering. If they had any doubt that the growth recovery is not very strong and sustainable then it is unlikely that they would have embarked on this exercise. However, I don’t think that we have too much to worry about the equity market valuations since growth sustainability is the precondition for tapering,
We have observed that in the initial stage of growth expansion, when the US bond yields are growing from 1% to 2%, the Asia Ex-Japan earnings yield actually tends to decline. That is, the price earning multiples or equity valuations expand. In the later stage, when the yield grows from say, 5% to 6%, inflation becomes the driver of this rise and the expansion of P/E (price-to-earnings ratio) multiple stops.
So in the current scenario, when the yield expansion is due to improving growth outlook I don’t think there should be increased concerns around the equity market valuations. However, to some extent the kind of volatility that we had seen in mid-2013 could repeat itself. Therefore, countries with high Current Account Deficits (CADs) in the emerging market universe including India, Indonesia, Turkey and Brazil may witness a round of de-rating and market volatility. With the economic growth turning relatively strong across the world, the valuations may remain relatively more stable than in the past.”
What are your current portfolio weights on the EM equities?
Substantial weight of our portfolio is assigned to North Asia including Hongkong, China, Korea and Taiwan. In the entire Asean regain, we have a significant underweight since we think that the region is relatively more risky. We currently have a small ‘Underweight” on Indian equities compared to the benchmark weight assigned to India in MSCI India.