Some pockets of the Indian equity market are expected to grow better than benchmark indices and from a global point of view, India is fairly priced in the large-cap basket, according to Sanjay Mookim, India strategist and head of Equity Research at JPMorgan India.
Mookim was talking to Niraj Shah of NDTV Profit on the sidelines of JPMorgan India Investor Summit.
He noted that mid-cap and small-cap stocks are trading at an all-time high price to earnings ratio and that equity risk premium in the market is all-time low, indicating that equity as an asset class is reasonably overpriced.
Despite this, the Nifty 50 weighted average PE is same as S&P 500. Hence, he said that he cannot advise people to stay away from India as they have to invest if they have a mandate.
Without being too bearish, Mookim said that the prospects of India growth can be reasonably positive. "India is benefitting from an increase in per capita income," he said.
At the same time, Mookim has advised investors to moderate their future return expectations.
"If you buy at elevated multiples, future return expectations have to be moderated," he said, adding that while the earnings will grow better than others, investors should not expect a 15-20% CAGR over next 5-6 years.
Mookim explained that on a 12-month basis, stock prices are usually driven more by earnings beat and upgrades than by a mere earnings growth. Lately, however, that correlation has deteriorated.
He also advised investors to build a quality portfolio with stocks that will continue to trade even in a downcycle. "Things can go sour for a variety of reasons," he said.
Mookim's Sectoral Picks
Investor's money is coming to equities because fixed income is not investable due to tax, noted Mookim. Among the few sectors on which he is bullish include real estate and power.
According to him, banking is the only sector where valuations make sense. However, he advises investors to be patient as they might have to live through bit of weak growth in the near term.
Macro Factors
Equity is an asset class that benefits from low inflation and high growth, he said and added that "we need to watch everywhere around the world if growth holds on or not."
"If the country's benchmark interest rate cut happens because growth is slowing down significantly then that is a very bad situation for equities," explained Mookim, adding that as of now the market believes that the rate cut will happen because of a lower inflation.
"India has had GDP upgrades in previous three quarters", he said, adding that a minor downgrade is expected this quarter.
The same trend is reflected in earnings as well. He noted that in the previous three quarters, earnings were beating estimates, but this quarter, there have been downgrades.
Watch The Full Conversation Here
Well, we are live with the JPMorgan India Investor Summit and in conversation with one of my favourite spokespersons, Sanjay Mookim, he is head of equity research at JPMorgan, joins us. Sanjay, it's been a really long time, but glad to be here.
Sanjay, big conference and I come to the detailing of the conference as well. But I'm judging by what you told me just before the conference that the India interest is very, very high. This is arguably, if I'm not wrong, as somebody was telling me, the largest investor conferences that you've done in JPMorgan?
Sanjay Mookim: That's right. It is a reflection of the interest in the Indian equity market. Our attendance ratios have hit 1000 delegates for the first time for a physical conference at JPMorgan. We are up in headcount about 30% YOY, the number of corporates attending, the number of clients who are flying in from overseas destinations to join our events. The kind of speakers we have at the main tracks. This is all a reflection, and I think a vote of confidence in the markets and economy.
Okay, and it's happening just at the right time because we've seen the first of the rate cuts from the Fed. Everybody's talking about us being in an easy cycle, though it's idiosyncratic because Brazil has raised, Japan is raising, etc., but largely global central banks as a pack are also cutting rates. How does that augers for risky assets at a time when valuations don't seem to be very favourable?
Sanjay Mookim: So it will roll back into the very, very hot debate of whether you get a soft landing or a hard landing. If you're cutting rates in a scenario where growth is okay, that's the best situation for risky assets. Equities, conceptually, are an asset class that benefits from low inflation and high growth. If you get inflation coming up, which is why you get the rate cut, but growth is sustained at a reasonable level, asset prices will be supported everywhere. However, if the rate cut is happening because growth is slowing down significantly, then that's a very bad situation for equities or for growth asset classes. I think the debate is still out, which sort of rate cut we've got. As of now, the market is of the belief that it's the former and that growth is fine. Inflation's come off. It's great for us, but therefore, what we need to watch everywhere in the world, not just in the U.S. to my mind. Does growth hold up or not, because if it doesn't, then the equities might come under some pressure.
What's your prognosis about the India growth therefore and what are you telling clients out here, 1000 odd people, you said, right? What are you telling them?
Sanjay Mookim: Sanjay Mookim: Well, mechanically, our printed growth numbers will come off and this is just the math of the base effect and the way that deflator is calculated. We've seen that in the June quarter, and that trajectory of it coming off a little bit mathematically is going to play out over the next three quarters. The only thing that's worth noticing is that India has had GDP upgrades in the previous three quarters, where printed GDP numbers beat everybody's estimates. This quarter, we've actually got a minor GDP downgrade, where it's coming lower than, let's say, the RBI’s expectation, and this is reflected, if I may, segue in earnings in the market is well, whereas for the previous three quarters, earnings were beating estimates, and we were seeing upgrades to, let's say, the Nifty or MSCI India, EPS. This quarter, around results season, we've seen downgrades. Two out of three companies have missed numbers, which is very rare for the first quarter, and you see a minor downgrade to the index EPS number as well. So on momentum of activity, whether it is through GDP or through corporate earnings, you've seen a minor deterioration in the market in the last quarter.
If FY26 numbers estimates out there look okay. Let's work with that assumption. Are markets egregiously valued for you to tell your clients here that hey, be very, very choosy about India despite the interest? Or do you reckon people will go out and say that India is among the few bastions of growth? I mean, Japan, Spain, India, maybe the U.S., very few economies growing, and very few economies showing earnings growth. So never mind the valuations; let's put in the money?
Sanjay Mookim: So again, you can make multiple stories out of this. If you look at the Nifty 50, the top 50 large-cap stocks in India, the weighted average P/E is exactly the same as the S&P 500. So there is no premium, there is no discount, and we've traded in line with the S&P for many years. So in the context of a global equity valuation, India is not overpriced on the large-cap basket at all. Yes, individual sectors may look well above average, and you can pick and choose those kinds of data points, but the index itself, relative to equities in the U.S., is fairly priced. However, if you go down the rug and you start looking at stocks in the 101 to 500 or 500 to 1000 and you take various cuts of that, all of those are at all times, IPs, and P/Es are difficult to contextualise because of the narrative of growth. If you then back work on a DCF, or if you look at the implied equity risk premiums, etc. on a very mathematical analysis of valuations, the equity risk premium in the Indian equity market is at all time lows, meaning that the amount you're getting paid for taking the equity volatility is the lowest that it has been in decades, and this means that equity as an asset class is reasonably overpriced.
Okay, so therefore, my question is, are you telling people to be very, very picky or are you telling people that, you know, still India will be good enough for your dollars to come in and get parked here? So what's the message at the conference here?
Sanjay Mookim: So look, we cannot tell people to stay away, because if they have a mandate to invest in India, if they've raised funds to invest in India, they have to invest in India. So telling people not to buy India is not really helping my investors. However, there are two or three points to make. If you buy at elevated multiples, the future return expectations have to be moderated. Let me give you a data point. If you had bought at the top of 2008, which was the top of the previous bull market bubble, even today, which is all-time high valuations, etc., your CAGR is only 8%. So timing of the market does depend on or does drive future returns. If you're buying at elevated multiples now, please keep your return expectations moderate. Yes, Indian earnings will grow. Indian earnings will go better with other people's earnings and all of that. But don't expect a 15, 20% CAGR in Indian equities for the next five to six years; you have to moderate your expectations of returns. The second point that we make is slightly different from what you were talking about: liquidity. What always happens in every bubble everywhere in the world? The first thing people forget is liquidity and what this means in the equity context is, let's say you bought a stock today that is trading 30 or $50 million today. In a down cycle, your ability to sell the stock as a large-cap institutional investor gets diminished significantly because the liquidity disappears. So the second filter that we advise people apply in their India investments is a quality portfolio filter where stocks will continue to trade even a down cycle. You will have the opportunity to buy and sell even if things go sour. Things can go sour for a variety of reasons. Global equity risk off or whatever. Do not get tempted by the hot tip that you got of a stock that's doing extremely well. Make sure you keep your quality filters on in your India investment today.
So future returns are moderate, but pockets within the Indian landscape might still give you better than the average return that the index will give you, right? Yes. So I'm trying to understand, where those pockets are, and how are you choosing these? Are these on the basis of earnings growth or, as you keep on telling me a number of times, earnings beat is more important?
Sanjay Mookim: So let me talk about the second part. We've done a lot of quantitative work, correlation analysis. Stocks on a 12-month basis are driven more by earnings beats or earnings upgrades than to mere earnings growth. In fact, the correlation of earnings growth to 12-month returns is zero. Yes, it's because the earnings growth is probably already well understood and it is priced into the market. Off late, however, we see some of that correlation deteriorate because it's becoming midcycle, latecycle, whatever you call it. So the correlation with earnings beats is weakening a little bit, but it still has to be one of the key filters in processing stocks in India. Without being too bearish, if you ask me about the prospects of Indian growth and economic growth, they can be reasonably positive. There are a lot of upgrades happening in India. There is a lot of assurance of growth, whether it is 8% or 6% in a debate, but it is still going to be a world-beating growth rate in the markets you're seeing, like, I say, India benefiting from the increase in per capita income. So the few sectors that we think will continue to benefit, we like, let's say the real estate space in the country. India is massively underpenetrated in residential real estate. Plus there's a second driver, which in India is what do you do with your money? See, one of the big reasons money is coming into equities is because fixed income is not investable, especially if you pay full tax and therefore whatever savings are generated necessarily goes into either equities or real estate. So equities markets are doing well. We think the real estate market will continue to do well. We like that sector significantly. We like, let's say, Power, where the power sector is reasonably tight. This is consensus; everybody understands that demand supply is tightening fairly quickly. Which stock, etc. is a debate to have, but the sector itself looks good. Banks are slowing and they have significant challenges because of the lack of deposits, but that's where the valuation comes in, because it's the only sector where valuations make some sense. So if you have patient capital, if you're looking for nice quality, large-cap companies where you can live through a bit of a weak growth phase near term, I think banks look great. They looked great to us for three years, to be honest.
One of the factors that a lot of people bet on—I would love your thoughts here—is that abhi tak FII money hasn't come in now. FII money will probably start coming; people correlate loosely to rate cuts and money coming into emerging markets and therefore India. I know you have an interesting view that I'd love to have. But just before we get to that view, if indeed money does come to India, so many people out here at the conferences, they want to put money into India, etc. Would banks be the first port of call with the highest weightage, good valuations, etc., and could that be a driver of banking stock fortunes?
Sanjay Mookim: That's what everybody asks me, and everybody believes that is what will happen—that when the foreign institutional money finally closes their underweight on India, they will do it through buying banks. The only pushback you have of that is that foreign investors largely or overweight Indian banks to begin with. It's not like they have no exposure to the Indian financials. It remains to be seen whether the incremental money, if at all, comes in, comes into more financial allocation. The question I get from investors' right feedback is, Give me non-financial ideas in India, because we already have a decent allocation to Indian financials. So it's not necessarily straightforward when foreign buyers even buy banks. But your first question is, What is the effect of rate cuts on flows into EMs? The historical evidence is that rate cuts drive money out of the U.S. economy, drive money into EMs and, you know, we get our 20% share of EM inflow. But that is not the prime mover. The performance of equity markets and the performance of currencies are all driven by growth differentials. So when let’s say the U.S. economy slows, and that's why you get rate cuts in the U.S., the growth differential shifts slightly in the favour of EM, and therefore the money flows into EM. But if in this instance you see the U.S. growth slowing and EM growth slowing at the same time because China, let's say, is still struggling to recover and North Asian countries are seeing a technology slowdown, then the growth differential doesn't necessarily move in my favour; it's just everything, exploring at the same time. That may not be a great scenario for flows to EMs.
But India being such a high weight in the EM basket, can India get idiosyncratic flows or is it not quite there?
Sanjay Mookim: The evidence we have so far is that most of the funds coming into India are EM funds. There has been a ballooning of India-dedicated funds. So there's a lot of India-only funds launched across the world, but the AUM in that is still relatively modest compared to the EM basket.
Yes, obviously so. But is it still impressive enough or not quite?
Sanjay Mookim: No, it’s a good start, I would say.
One last thing, I remember this very interesting conversation that I had with you two years ago when you said that, okay, looking at how we are right now. This was in March sometime; I think 2022, ‘21; I'm not sure and you told me that the return that we expect for the rest of the year is zero. I would love to know we are not in March; we are in September; there is an easing cycle so on and so forth, etc. What is your expectation for returns? If not for the next three to four months, then let's say for the next 15 months.
Sanjay Mookim: Well, our published focus for the next three to four months is by coincidence Zero. . Sorry, I couldn’t help it. We haven't put out a number for next year, as well and we'll get back to you when we get our heads on this, because right now, the equity market globally has a lot of macro challenges. With the elections in the U.S., the policies of the new administration, and the debate on whether it is a soft landing or a hard landing, I think that will have a lot of impact on other prognosis as well.
Okay, my final question is a bit about the conference and the nature of the people coming in. Are there newer participants, completely new participants? Part one of my question is that. Part Two of my question is, the corporate participants in the conference, are these largely from the themes that you like, or are there some exciting ones out there that you haven't necessarily made it a part of your overweight, like you mentioned, real estate, power, etc., so maybe some presence might be there beyond that. So give us an answer on both of these?
Sanjay Mookim: So in terms of investors, yes, there are people who are discovering India, in a way. But I must highlight that, at least, in my opinion, there are not that many left. India has been reasonably well understood and studied, even by whole pools of foreign money. They may not have invested in it, but I doubt there are too many people unfamiliar with, at least the large caps in India. On the corporate attendance. Yes, there's a whole bunch of people, but it is sectorally diverse. We do not try and filter our conference to what may be working now or looking now, because, of course, investing is hopefully for the medium term.
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