Two Reasons Why Bharat Iyer Is Overweight On Indian Stock Markets

“India would slam dunk be an overweight” for him if he were a global or an emerging market investor with a medium to long term view, according to market veteran Bharat Iyer.

He cited two reasons for his optimism: the usual demographic advantage India has and which he expects to get stronger in the next 15-20 years. The other, he said, is that in a world with a lot of liquidity, “We have the ability to absorb a lot of capital and we offer very attractive yields.”

Iyer, however, cautioned earnings wouldn’t grow at the expected 30% plus in the near term if the second wave of Covid-19 is not curtailed. India’s underperformance against global markets could continue until a critical mass of the population is vaccinated and there is more confidence on growth, he said in an interview with BloombergQuint’s Niraj Shah.

Global sectors such as mining and metals, and information technology have fared better than the domestic-oriented sectors such as banking, auto and real estate in the past two months, he said. Nonetheless, he advises using the dips in the domestic sectors to “beef up positions”.

The Indian economy will be driven more by local than global factors he said, adding that the domestic consumption segments have a lot of potential.

Also Read: Three Headwinds That Led Nomura To Reallocate From Cyclicals To Defensives

Emerging Vs Developed Markets

The debate on the potential of developed and riskier emerging markets is “not going to be very easy” and will vary from country to country, he said. Even within the developed markets, the U.S. seems to be outperforming Europe due to better vaccination and growth data, he said.

Some emerging markets will have more success in terms of the vaccination drives initially, he said. According to Iyer, the index of economic surprises on the positive side will, therefore, be better for some markets and worse for others.

“You'll be surprised to know that three EMs have actually raised interest rates in the last three months,” indicating that some EMs are very confident and comfortable with their growth construct. Some, however, warn of pulling back stimulus and others still need to keep the stimulus alive, he said.

Also Read: Demand Recovery Will Outweigh Risks For Indian Equity Market, Says Spark Capital

U.S. Outlook

The U.S. markets are in “the sweet spot” due to extremely positive vaccination and growth data, he said. But inflationary "concerns are valid and one must be on the lookout for that data which, if it gets ugly and becomes the cause of rising yields could pose a problem”.

Watch the full interview here:

Edited Excerpts

Bharat, let’s focus on the world markets for a bit and then try and juxtapose India within that picture. The U.S. seems to be doing all the right things currently and what do you make of their vaccination drive, the economic data that has come out from there including last week’s jobs report? What does all of that mean for the U.S. markets?

I think it’s absolutely a Goldilocks kind of syndrome as far as the U.S. markets are concerned. I think the vaccination right there is going very well the last data I saw; they have crossed about 43% in terms of active vaccinations done. So, I think they’re making very good progress as far as the vaccinations are concerned. On the other hand, if you look at the economy, I think it’s doing very well. I mean primarily it’s being driven by housing and the manufacturing sectors at this point in time but by and large economic data that’s coming out seems to be surprising on the positive side. I think you have another engine making the fire which is the services sector because you expect that once the vaccination drive reaches a particular critical mass or a particular threshold, the services sector is also going to start picking up. So, you also see another driver of growth waiting to happen and all this with inflation remaining relatively well behaved. So, I think they are absolutely in the sweet spot which is the reason the markets are reflecting both the current positivity as well as expectations that the futures hold.

My question is just that they had the benefit of being able to give out a large amount of stimulus and within the other major markets across the world, there is one problem, Eurozone has some issues, China has the discounting factor of most nations viewing it with distrust even though their own pullback from the stimulus has led to a pullback in the Chinese markets and India while not a major market on the world scene in that sense but since we are attached to it, is seeing fresh cases. So, to your mind does it mean that a large number of global investors will probably wonder what’s the need of drifting away from the mother market currently when everybody else has a problem, and the mother market does not?

Well, I guess that we’ll have to segregate the near-term from the medium to long term. I guess if you look at the market narrative what has happened in the last 12 months is, initially you saw central banks in particular, pumping across the world pumping in a lot of stimulus and that the rising tide lifted all goods. Now what you see really is that the markets are getting a little more discerning for two reasons. The first reason is, I guess markets are recognising that look, the best of the stimulus bit is poor and you’re actually beginning to see monetary stimulus peak i.e., possibly beginning to fade a little bit and we can talk about it later if it’s topic of interest to you. So, that’s one thing which is happening which really means that valuations have likely peaked and this general trend of all markets doing well is over.

So, now markets are getting more discerning and what they’re really focusing on is, which are the countries where growth is meeting expectations or beating expectations and which are those countries where either growth is not meeting expectations, or it is running below expectations for any number of reasons. It could be a second wave or could be anything else and we need to see a dispersion in terms of returns and a dispersion in terms of market performance too. I guess we are going through that phase and what it really means is that markets which tend to meet expectations or beat expectations we continue to stay a bit whereas if you don’t meet expectations or you have a second wave etc., then in the interim, you are going to underperform.

I’m just wondering as there is also conversation in international media whether the U.S. economy is overheating in the first place. Now, forget the last three days but until before that there’s this whole fear of inflation and rising yields putting some problem or becoming some problems for the U.S. markets as well what with the fact that enough and more data which sliced in a particular fashion will show that the U.S. markets are so much more expensive as compared to historical standards. On a relative basis, the U.S. economy and markets may be doing very well but on absolute basis do you reckon, in your assessment, that there are there is some danger lurking around the corner or would you believe that the economic uptick will take care of the fears around the markets as well, U.S. in particular?

As you rightly mentioned we’ve seen yields spike up very meaningfully. Now yields can spike up for two reasons—they can spike up because the growth is doing very well and confidence on growth is improving or there is a huge inflation problem. So, far I guess the good part is that yields have gone up largely because growth data has surprised on the positive side and as I said there are other levers to look forward to over the future. You mentioned the fiscal stimulus is still to play out, services are yet to join the party etc. So, a large part of the pickup has really got to do with the influence and the confidence on growth of the future. We haven’t seen any early data as far as inflation is concerned. So, as long as this construct continues you won’t really see any major danger to the market and the markets could stay well supported. But yes I mean as both of us know very well, inflation is typically the party-pooper for markets on a cyclical basis and one has to be very wary of inflation because if yields start going up not because of more better anchored growth expectations but because inflation is firing its heads, then I guess one would have to be concerned. I would stay positive in the U.S. markets but yes definitely you have a valid concern. So, watch out for inflation—if that data starts getting dirty and if it’s not getting so far, then there’s reason to start unwinding the positive stance.

One more question, would you believe that investors or short-term investors or traders the world over for the near term would look at the vaccination data and how countries are vaccinating their populace and give that more weight as opposed to some of the other factors? I see a lot of reports which are constantly referring to how soon would nations vaccinate and therefore by that study, the belief is that if the vaccination is done quickly then the economy gets back on track quickly, so on so forth. Would that be a telling factor, or you reckon that it’s a talking point but not a major one?

No, it is a meaningful data point. As I said what happened was with that dash of liquidity that came last year, obviously growth expectations were very well anchored and there were very positive estimates out there—be it for economic growth or be it for earnings growth a bit of a low case. What investors now will look at definitely is, in terms of the vulnerability to a second wave or third wave as the case may be and also vaccinations because the good part is, you have a vaccine so you know that this problem is not something that’s going to continue into the future and we don’t have a time frame for it. It’s not a three- or five-year problem. You have a vaccine so as long as you get a bulk of your population vaccinated, it really means that the problem is going to be contained within a particular time frame. So, investors will pay new attention to both the number of cases coming up in the second wave or the third wave as well as the vaccination data and what percentage of the population is vaccinated.

What’s your sense of how do you juxtapose emerging markets in the current landscape? Again what is true for India would it be true for EMs that generally more risky asset class in perception and if the vaccination and if the economic factors-- all of them are pointing northwards for the U.S., would EMs as a basket suffer in the near term? Would that be a factor of flows as well as the currency?

The way I look at it, I think the markets are going to be and investors are going to be a little more discerning and it’s not going to be a very easy DM versus EM comparison. I guess because what’s going to happen is, even within DMs, you probably see that the vaccination data in the U.S., is much better, the growth data picking up in the U.S. is much better, the stimulus seems to be working much better in the U.S. whereas if you see Europe, I mean it’s mixed—be the success on the vaccination front or be it the data coming out there or be it the success of the stimulus. So, is there a reason for U.S to outperform Europe? Yes, there is, likewise I think what’s going to happen even within EMs is, some markets are going to have more success in terms of the vaccination drive initially. Yes, eventually all of us will get there but initially some markets will have more success or the index of economic surprises on the positive side will be better for some markets and worse for some markets. I guess that will get reflected in relative market performance and you’re already seeing that even in the policy construct, isn’t it? You’ll be surprised to know that three EMs have actually raised interest rates in the last three months and that tells you that some EMs are now very confident or are very comfortable with the growth construct that they have whereas some are warning of pulling back stimulus and some are saying that we still need to keep the stimulus very much alive because we are not ordering the goods. So, I guess it’s going to be a very country by country call rather than abroad versus EM call. That said, I guess the point you made about the dollar is definitely going to stay well supported on a secretive basis in this kind of construct. So, investors are going to factor in currency concentrations when they take place.