Bullish on DLF, L&T, Maruti Suzuki and RIL from Indian equities: Jonathan Garner


“Japan is a very strong story and it trades only about fourteen-and-a-half times one year forward PE,” says Jonathan Garner, Morgan Stanley.

So, are you saying we should expect only, let us say, mid-single digit kind of realistic return expectation from the Indian markets as well?
That is the base case. As I mentioned, the bull case is higher than that. I mean, do bear in mind that our base case is that the S&P 500 has downside. The S&P 500 base case view we have is 4500, not 5000. And, of course, a lot of the gains in the S&P have come on the multiple side. In fact, probably more of the gains on multiple relative to earnings for the S&P than for India where the earnings growth story is very strong. But you cannot argue that these markets that have done well are cheap with the possible exception of Japan. Japan is a very strong story and it trades only about fourteen-and-a-half times one year forward PE.

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Also, just in terms of a strategy for India, you said that you all have been bullish on India. You do like financials as well as domestic industrials. Anything specifically that you have added on that front or you find even more attractive right now?
We also like consumer discretionary and property. We are restricted, unfortunately, in talking about individual financial stocks but the names that we have in our focus list from India at the moment are DLF, Larsen & Toubro, Maruti Suzuki and then the mega cap Reliance Industries. But on the financial side, I am afraid I cannot comment on detail on the stocks, except to say that the financials in India are perfectly capable of an earnings CAGR of 15% to 20% on a three- to five-year view. So, they are fundamentally very attractive. That comes back to the story in India which is rapid economic growth, urbanisation, household formation, formalisation of financial market activity in the context of lower and more stable nominal and real interest rates, that is extremely exciting for sectors like financials but also for property clearly.

For a moment, just out of curiosity, I want to go back to outside of India, which is Japan. It is at a 30-year high. You are saying that it is a very strong story and that too not available, very expensive. What could it do to flows into the region? Could it mean that incremental flows from global investors coming to emerging markets, a big chunk of that could be drawn towards places like Japan?
Japan is getting very large inflows, probably about 70 billion US dollars last year. Very strong inflows currently. It is also exhibiting outperformance in terms of earnings growth, nominal GDP growth and an improvement in return on equity. But I would not see it as money from emerging markets being diverted towards Japan. It is really within the whole global investor universe there is an up weighting of Japan and I think there are global investors that are interested in India and India is getting its share within the EM bucket as China is losing share. So, it is quite remarkable that India’s market cap within MSCI EM is gaining quite rapidly on China. It is not at all inconceivable that India could be a larger market than China within the EM universe within a three- to five-year horizon.

India has also been a very big beneficiary of flows, both domestic and overseas on a 10-year basis because of the reform, superior growth, yes, you spoke about, but also the reform momentum triggered by the current leadership and they are also now taking stock of it and talking about it. I am sure this comes up in many of your conversations with your clients overseas as well. But we at this juncture, 10-year into this government, what incremental work would the foreign investor community like to see in places like India? There is talk of new generation reforms, etc. Where would you see incremental work like to happen?
I think it is to a large degree more of the same. If you just sort of zoom in a little bit on recent developments, I think the fiscal announcements are really quite important. So, maintaining fiscal discipline as the economy grows, targeting government infrastructure capex, enabling private capex, being open to foreign direct investment and portfolio flows, private equity flows.

I do not think there is anything dramatic and new that is really needed. It is a mix that has succeeded from an investor perspective for a considerable time and we have been overweight India for a considerable period of time.

I also wanted to get a feedback on what investors are thinking about India with respect to largecap versus midcaps. Are they getting a bit impatient about the underperformance that we have seen from the banking majors in the largecaps because the midcaps and smallcaps has been a completely different story. Are they getting more gravitated towards the broader end of the market now?
Most of the investors that I talk to are not really involved in Indian mid and smallcaps which may happen over time. So, for them, the index is the MSCI India and it is the larger cap stocks. It is encouraging to see, I mentioned some of our preferences just a while back, but some of the largest market cap stocks are performing well recently and so I do not encounter any great pushback about lack of performance for India. And again, remember that it is relative performance that matters for most of our clients.

So, with the China market, unfortunately, have not got off to quite a weak start to the year. Again, people are perfectly happy with the India exposure they have in their portfolios.

In terms of the flows then you see, do you expect an increased pace of flows coming in for the Indian equities now and that continued flow that we have seen, do you think that pace is going to be increasing?
Well, clearly, it is an election year. India is not unusual in that regard. There are important elections upcoming in South Korea, in Indonesia and obviously in the United States. So, that may lead to some volatility and our colleagues, Ridham and the team have written about that. But broadly speaking, I think as I said, it is as it goes environment and India will get its share, probably more than its market weight share, as it were within the EM flows that are coming in from global investors, that is certainly our recommendation to put more money to work in India.

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