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Indian market seems expensive compared to other emerging markets, says Robert Buckland of Citi

Updated : January 28, 2019 06:36 AM IST

Ahead of the budget and the general elections, CNBC-TV18 speaks with leading global market masters about how they are approaching India ahead of these two crucial events. It also tries to glean the global context in which Indian economy and Indian earnings are situated. To discuss this Latha Venkatesh caught up with Robert Buckland of Citi.

Q: Your view on global equities in 2019, will emerging markets (EMs) outperform developed markets this year?

A: We here at Citi expect global equities to be up 14 percent this year. The big rally we have seen so far in the year is already into 5 or 6 percent of that. So, in general we think this bull market is stalling but not yet finished.

As far as emerging market versus developed markets are concerned, we have raised emerging markets to an overweight at the start of this year and we have been pretty cautious on them last year.

So, we are positive on global equities but we are now more positive on emerging market equities.

Q: What about India, what will your rating be of Indian equities?

A: I said last year that India has always looked kind of expensive relative to the emerging market stock markets that we can see at the moment. So, at the moment we are more cautious on India relative to emerging markets.

However remember within emerging markets we are quite positive, so we might be underweight India in an emerging market portfolio but that doesn't mean that we are particularly negative because we are positive on all emerging markets.

Q: What makes you cautious on India? Is it the upcoming elections, possibility of fiscal profligacy before the elections?

A: I am no great expert on your domestic stock market, it is my job to either engage international investors or not in your market. From outside I would say, India has always looked little bit expensive to us, propped up by strong domestic money inflows but international investors are generally put off or can be put off by the high valuations. To give you some sense of that, your market trades on 18 times 2019 earnings compared to the US now trading around 13 or 14 times.

So, nothing against India but it just looks a little expensive to us.

Q: As a foreign investor theoretically, what would your reaction be if there is a large fiscal deficit, would that be a worry ahead of the elections?

A: It is my job to put India in a global context, political and fiscal concerns - everyone has got those right now. So, I wouldn't zero in too much on that, that is not the main reason why we are less keen on India than other emerging markets, really it is much more of a valuation driven thing.

Q: The big theme this year has been the global slowdown. The World Bank and the IMF have downgraded global economy because of trade wars. In your assessment, is it just a slowdown or is it as bad as a recession and would other markets be shock absorbed from the slowdown that we are seeing in China?

A: The title of the report I wrote at the start of this year was "Slowdown not recession" and I think that is a great way of summing up how we see things.

You got to remember, markets aren't going to sit around and wait for economists to downgrade GDP forecasts. You are clearly starting to see those coming through as you are saying but that is why the market has moved sharply lower in Q4 of last year.

To put it in context, we reckon we started this year with the stock market discounting 4 or 5 percent off global earnings per share in 2019. To give you some perspective on that, analysts if you aggregated all of their company forecasts in 2019, started the year of forecasting plus 7 or plus 8 percent. So, we would argue that the market was already saying at the start of this year that analysts needed to downgrade by 10 or 11 percent. There was a lot of bad news in the price, that was our main argument at the start of this year.

Q: Which way you think crude will head in 2019, considering that you are speaking about a slowing economy, shouldn't that keep crude prices subdued?

A: Obviously there is always a bit of trade off, some markets want oil to go up, some market like you guys want oil to go down. We think a combination of weakening demand and a big burst of supply particularly from shale in the US has contributed significantly to the down draft in the oil price so far this year and of course towards the end of last year.

We think the oil price should stabilise as we look ahead, particularly because even oil is starting to price in something a little bit worse perhaps than just a global economic slowdown. It was starting to think about pricing in a global recession, we don't think that is going to happen. We wouldn't be predicting two rate hikes from the Fed if we thought that was going to happen.

Q: I would like your view on the Fed's contracting of its balance sheet. Do you see that continuing and if it does what ramifications can that liquidity crunch have on global equities and emerging market equities?

A: The Fed has been contracting its balance sheet for some time now. Probably more important are what other central banks going to do particularly the ECB. We are generally expecting quantitative easing (QE) policies which have been the really profound new thing in this economic cycle and market cycle relative to the cycles that I have experienced in my 30 years in this business, we are expecting central banks to unwind that as we move ahead. They will do it gradually and if they see big market volatility as a result of them doing the unwind of QE, they will back off a bit. I suspect that is what the markets are little bit thinking about at the moment as they have rallied quite hard.

However QE will unwind, it naturally unwinds remember as portfolios of bonds turn into cash on central bank balance sheets. So, yes we do expect that to continue to unwind. Again consistent with our view that the world economy is doing okay, it is slowing down but it is still going to do okay in 2019 and into 2020.
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