The absolute valuation of Indian markets do not appear too expensive, though the relative valuations do, according to Manishi Raychaudhuri of BNP Paribas.
It may seem like India's relative value is expensive when compared to other Asian countries, excluding Japan. But this is mainly because the north Asian markets, especially China, haven't been doing as well, Raychaudhuri, head of Asia-Pacific equity strategy at BNP Paribas, told BQ Prime's Niraj Shah.
"For the relative valuations to correct themselves, the north Asian markets, particularly Hong Kong (and) China, would have to recover," he said. "Then, things would appear a bit more stable in the eyes of the foreign investors."
India-Canada Feud
Raychaudhuri said the country enjoyed a relatively stable geopolitical position for the past year or slightly more. He doesn't anticipate a drastic change in this situation amid the diplomatic row with Canada.
Ultimately, investors—whether they are foreign direct investors or portfolio investors—are primarily concerned with the market fundamentals, growth prospects and how government policies impact the domestic economy, he said.
"If this particular environment does not change significantly, we don't think either the foreign direct investment picture or the foreign portfolio investment picture would change significantly either."
How To Invest In Indian Equities
Raychaudhuri highlighted that the current approach to investing in Indian equities should prioritise careful stock selection.
It is crucial to consider sectors and specific stocks that exhibit a level of earnings resilience, where earnings projections remain steady and are expected to increase in the future. These stocks should benefit from domestic economic trends and supportive government policies, he said.
Earnings Resilience
The country continues to be a growth market, with both economic and corporate earnings growth showing promise. For investors, identifying relatively undervalued stocks in favourable sectors can lead to substantial gains, according to Raychaudhuri.
While this task might be challenging presently, an approach is to determine which sectors are likely to experience increase in earnings estimates, he said. "The sectors which are appearing expensive today might appear cheap tomorrow if the earnings estimate itself goes up."
Raychaudhuri pointed out that some of the sectors with potential earnings resilience include financials, particularly the private sector financial institutions, which are gaining market share.
Another sector is industrials, where there's an uptick in order flow related to railways, defence and various government-sponsored infrastructure projects. These developments are expected to have a positive impact on private capital expenditure, he said.
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