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India shining star in EM pack; focus is on rate-sensitive sectors: JPMorgan

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India shining star in EM pack; focus is on rate-sensitive sectors: JPMorgan

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JPMorgan India said in terms of stock selection, our framework very clearly relies on earnings surprises. Selecting stock A versus B depends upon the ability of the company to deliver earnings better than expectations. We really like the rate-sensitive space in India because the one thing that is happening in the near-term from a policy perspective is the significant monetary stimulus in the economy, said Sanjay Mookim, strategist, head of India equity research.

JPMorgan is having its sixth India Investor Summit. It is also the best time to have the conference with Sensex nearing 60,000 and the Nifty50 nearing 18,000. To discuss in detail the outlook for the economy and the investing strategies, CNBC-TV18 caught up with Sanjay Mookim, strategist, head of India equity research, and Sajjid Chinoy, chief India economist, JPMorgan India, and Madhav Kalyan, SCO-India and CEO, JPMorgan Chase India.

On FII flows, Mookim said what they have got are two kinds of feedback- one is that people are happy the markets are buoyant, second, it is also becoming a particularly difficult time to invest because stocks are moving far more than investors expected.
“So, finding correlations, drivers of stock price movements are becoming trickier. So, it's making fund managers’ job a little bit more difficult than you could expect normally. But the expectation is that the global liquidity environment remains supportive. There are also issues in the rest of emerging markets, for example, India seems to be the one shining star in the emerging markets for now and that seems to be benefiting at the moment,” Mookim said.
On expected GDP, Chinoy said, “One has to separate what is going to happen over the next three years from the next three quarters. For this particular year, we're probably comfortable with a GDP growth rate of close to 9 percent. The good news, of course, is the pace of vaccinations have gone up, because that really sets the stage for what the economy will look like over the next four to six or eight quarters, without the constant fear of recurring waves.”
“However, it is important to step back and even as we have reached pre-pandemic levels, recognise that 18 months into the pandemic, going back to the pre-pandemic level is not a sufficient criterion. We now have to start measuring ourselves compared to where we are versus the pre-crisis path. Even if India's growth is at 9 percent, like most other emerging markets, we will be below the pre-crisis path. Therefore, figuring out a growth strategy for the next two or three years is going to be crucial,” he added.
“We have to accept the fact that both consumption and private investment will take some time to recover. Consumption was slowing before the pandemic. There has been some hitch in labour markets and balance sheets. The good news is that there has been a lot of deleveraging of balance sheets; large corporates are in much better shape today than they were five years ago. So, the issue is demand, utilisation. If one were to look at RBI’s latest survey, utilisation to manufacturing is in the mid-60s. So, the question is where will that demand come from –it will have to come from exports and government spending,” Chinoy said.
“The export lift is cyclical, so we have to lay the groundwork now so that even when the cyclical lift is away, India can keep increasing its market share particularly in manufacturing. It is happening in services. But this is where government spending becomes important,” he mentioned.
According to him, the silver lining is that revenues are stronger. He explained, “We have seen a formalisation of the economy, and that's showing up in higher revenues. So, it is important that we don't over-tighten the fiscal, the guide path that is laid out is a very sensible one. So, if we get higher revenues this year, it should be ploughed into higher capital expenditure with its large multiplier effects.”
Kalyan said, “At the investor conference this time, we have 775 investors coming in to interact with about 75 companies, but the thing that they really look forward to when they come to the conference, is the ability to engage with policymakers. We do have cabinet ministers, policymakers who will be engaging with investors on the most recent set of reforms.”
“We are hearing positive messages on telecom, the formation of the ‘bad bank’, just in terms of the efficiency that it brings in being able to consolidate the assets and having to deal with just one counterparty as opposed to having to deal with many counterparties who have different motivations in the way they engage in dealing with a distressed asset. So, just that move to be able to deal with one counterparty with commercial considerations, investors say that does make a lot of sense,” Kalyan further mentioned.
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When asked what is JPMorgan selling to foreign investors, will it be the consumption story? Mookim said that the house is very clear in their recommendations. He said, “There are two aspects to what is happening in the market, one, the technical trade early in January, when we argued that liquidity will fill the wings of the market and raise multiples and valuations, it has frankly gone on for longer than expected. But that is the phenomena I would highlight as driving valuations and multiples higher. However, in terms of stock selection, our framework very clearly relies on earnings surprises. And selecting stock A versus B depends upon the ability of the company to deliver earnings better than expectations. If you believe that framework and we do, that is something we really want to push; we really like the rate-sensitive space in India because the one thing that is happening in the near-term from a policy perspective is the significant monetary stimulus in the economy, with liquidity being served at rates that are at multi-decade lows, I don't think India is in the situation where there is no demand for credit.”
He further added, “We believe that we have done a lot of work in our research to highlight why as the economy opens, we should see better credit flow in the system. Therefore, the rate-sensitive sectors such as banks, autos, and possibly real estate and associated sectors are the ones we want to focus on as the candidates to potentially deliver surprises.”
For the entire discussion, watch the accompanying video
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