As macroeconomic factors shift in favour of emerging market economies, especially those in Asia, the high valuations of India’s equity markets may finally be justified for the "first time in a long time”, according to Andrew Holland.
Asia’s likely to be the growth engine of the world in coming years, led by China and India, said Holland, chief executive of Avendus Capital Public Markets Alternate Strategies that operates the largest category III hedge fund in India. That, he told BloombergQuint’s Niraj Shah in an interview, will result in a fair share of inflows from domestic and foreign institutional investors into the country.
“If you just take millennials as a form of spending power in the hands of people, there are 60 million in the U.S. but 300-odd million in China and India each,” he said.
Indian benchmarks have been hitting record highs after recovering from the worst selloff in more than a decade. The Nifty 50 index is currently trading at 22.3 times its 12-month forward earnings, more than one standard deviation above the 10-year range.
Holland expects the rebound in corporate earnings, seen in the second quarter of the financial year 2020-21, to continue. “I won’t be surprised, and I’m talking about a calendar year now, but earnings should grow 20-25% this year,” he said.
The favourable conditions have been brought on by the excess liquidity pumped into global markets by central banks across the world. The continued rise in coronavirus infections and deaths, and hence lockdowns, means central bankers will continue monetary easing policies well into the first quarter of 2021, he said.
In India, Holland expects returns from a broader group of stocks instead of the handful of companies that excelled in 2020. “The real sectors will perform which in our view will be banking, energy, industrials and consumer discretionary sectors,” he said. While IT and telecom will also perform, these sectors will be the real outperformers, he said.
The automobile sector, however, is likely to face pricing and margin pressures because of rising commodity prices. It has benefitted from low commodity prices for quite some time and will see narrower margins for the coming two-three quarters, according to Holland. But record sales which will counter potential contraction in margins and he sees earnings growth in the range of 20%.
Watch the full conversation here:
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