Four Reasons Why Maneesh Dangi Foresees A Correction
Maneesh Dangi sees domestic markets underperforming in the next 12 months as India’s macros have turned for the worse and equity valuations are “moderately expensive”.
While he does not see a bubble, Dangi, investor and former chief investment officer at Birla Sunlife Asset Management Co., said the market price is simply an expression of probability adjusted future outcomes and there are significant risks to good outcomes. That has prompted him to go underweight on equities even as he suggests using a potential correction as an investment opportunity.
“Markets are cycles. Rates go up, rates come down. PEs (price-to-equity multiples) go up, PEs come down. Boom-bust happens,” he told BloombergQuint’s Niraj Shah. “Precisely when the feeling of ‘TINA’ happens is when the markets come down. Why do you think we make excesses—it’s because we inherently believe there is no alternative to the excess we are making."
Dangi attributed four key reasons for his ‘underweight’ stance:
A two-speed recovery in the world.
Higher predictability of inflation in India versus the west.
Lower equity risk premium in India.
Classic markers of retail euphoria and primary issuances.
Developed economies are likely to exit Covid ahead of emerging peers due to superior rates of vaccination, Dangi said. As a consequence, they will also do some form of tightening in the next 12 months which will leave no choice for the emerging markets but to tighten rates prematurely, according to Dangi.
India’s recovery has been painfully slow. “Typical binding constraints of an emerging market played out for India and the sharp output loss for the economy is both substantial and durable.”
Near-term pressure on wages can certainly lead to high inflation for next 12-18 months in the developed world, according to Dangi. And even though he is not among those who see inflation sustaining for a decade, he expects the Federal Reserve and other central bankers, along with governments, to turn restrictive once they begin to see inflation. “The only key change in policy regime in the U.S. and EU is that they aren’t likely to tighten in anticipation of inflation but only react as they sight it.”
Dangi’s base is a tighter policy regime in 2021-22 in light of inflation pressures. In India, the case for higher inflation is easier to make, he said, citing all the pre-conditions for a faster increase in consumer prices—higher food prices and industrial commodities, supply shortages or dislocations and a “somewhat complacent monetary policy”.
A combination of “high inflation” locally and “moderate to low inflation” in the world isn’t a good outcome for Indian markets (and other EMs) which rely so heavily on outside risk capital, said Dangi.
“The existence of the idea that inflation could be misbehaving is a big deal,” he said. “You (investors) have made money now. Since you have moderately expensive valuation with not such great macros, take chips off the table. And we will review the stance in two months.”
Lower Equity Risk Premium
Even at current valuations, available risk premium—or potential return in excess of the risk-free rate—is substantial in most of the developed world. Compared to the S&P 500, India's equity risk premium is lower.
The equity risk premium for overseas investors pumping money into India has been 7-8% over the U.S. risk-free rate, according to a newsletter written Dangi. By comparison, it’s 4.5% for Indian investors, he wrote, citing a Reserve Bank of India paper.
To be sure, equity risk premium is the not the only way to find out if markets are expensive. As opposed to Dangi’s real yield comparison, investors can also look at a combination of bond yields, inflation and earnings yield. For instance, the ratio of Nifty earnings yield and nominal bond yields is 0.85% currently, not a big premium over the historical average of 0.74%.
Dangi cited the deluge of primary paper coming into the markets and record retail participation. “This euphoria is a classic example of markets being in the stage of distribution where big money or smart money distributes and retail gives in,” he said. “The supply of paper is large and the key question is who is going to consume so much of offering?”
While others may differ with Dangi’s forecast of a correction, his expectations underscore concerns.
Morgan Stanley, in a note, flagged how its lead earnings indicator, which otherwise has a forecasting ability of 95%, is at its widest. It suggests the next two years’ compounded earnings growth for the BSE Sensex in the range of 36% and -15%. This wide band underpins the level of uncertainty in the current environment.
Watch the full interview here: