Narendra Modi-led government hasn't missed the bus on reforms : Mixo Das, South-East Asia equity strategist at Nomura
Updated on: 10 Jun 2016
South-East Asia equity strategist at Nomura Mixo Das on safe bets in equities, the reappointment of RBI governor Raghuram Rajan and the government's reforms push
The Narendra Modi-led government has not missed the bus on reforms, says Mixo Das, South-East Asia equity strategist at Nomura.
"We are at a point where the actual reforms can beat expectations, and that is where the positivity comes from. It is not like they have done a lot on reforms, but it is also not like they are regressing on reforms," Das said in an interview.
You recently listed South Korea and India as being relatively safe as far as Asian equities are concerned. Take us through your reasoning.
Our key overweight markets are India, followed by Korea, Taiwan and Indonesia. Our key driving factors—there are three prominent things that we take into consideration—growth, valuations and risk premium. On our key overweight markets, you will find that growth is a very pre-eminent consideration, and this is true for emerging markets (EMs) in general.
Most investors look at EMs for growth—if they just wanted cheap stocks, they could go to the US or Japan, where you have companies at decent valuations. If growth is there, then we take into consideration, the valuations. If only valuations are low, and there is no growth, then it is a market that we are unlikely to be extremely positive about.
The third factor—uncertainty and risk premium—can come in many ways. It could be political instability, it could be external risks such as Fed raising rates, or what happens in Chinese credit markets.
In India's case, our bullish outlook is largely being driven by a turnout in the growth story. We are seeing a lot of micro-indicators turning positive—consumption of cement, steel, power generation—all of this is showing a sharp turnaround, indicating that there is some momentum in the recovery.
It also helps that there are some reforms coming through—this helps investors have a better visibility on the long-term future or potential of the market. Once they get the GST (goods and services tax) done, and they've already got the bankruptcy code in place, and with a few more reforms coming through, you'll have that much more clarity in the longer-term outlook. That helps reduce the uncertainty factor.
In Korea, the overweight is largely based on the fact that Korean companies on an earnings basis are doing very well. Q1 earnings have outperformed market expectations quite a bit, and this never usually happens.
Korea is notoriously famous for having exaggerated earnings estimate, which companies always miss. This is the first time in many many quarters where earnings in Korea have beaten expectations. That is what is driving the upgrade cycle—this momentum can continue in the near term. Part of it is also due to that fact that Korea is highly exposed to developed market growth, especially the US—this helps because developed markets growth is doing better in terms of overall global growth.
In Taiwan, our overweight is more tactical, and is more driven from a valuation perspective, rather than growth. If you look at the tech sector in particular in Taiwan, it was trading at standard deviation 20% below the long-term average. We thought this was a good opportunity to get in and capture some of the gains, particularly given the fact that the tech cycle tends to improve in Q3, largely around the launch of new products. We want to be positioned in equities ahead of this pickup.
In Indonesia, the story is similar to India where growth is improving. Cyclically, we see growth picking up, structurally we see growth picking up, given all the reforms that are happening, and that is what is driving our larger optimism on this country.
You listed reforms—has the Modi-led government missed the bus on this? Again, there is a view that valuations in India continue to be expensive. For Korea, you had talked about corporate earnings being the major factor—but for India, earnings have failed to come back.