India Does Not Look Attractive On Valuations, Says JM Financial's Vinay Jaising

With the U.S. unemployment rate narrowing to 3.4%, and the Fed claiming two vacancies for every person needed, the data does not help in keeping inflation at bay, according to Vinay Jaising of JM Financial Services.

"The only way to control inflation is to soften the job market, increase interest rates and keep it high for a longer period of time," Jaising, managing director of portfolio management services at JM Financial Services, told BQ Prime's Niraj Shah.

While the Fed has hiked interest rates from 4.5% to 4.75%, Jaising forecasts a further increase from 5% to 5.25%, at which rate it will sustain for a longer period of time. This period is when the pain will emerge for people who have net cash or reserves, he said.

"Just the news of China opening has brought Chinese markets up by 50%, Indian markets is flat to down a bit—down by 4% to 5% last month—while the U.S. is up by 8% to 9%. Therefore, the world is taking risk on trade already."

Over the last two months, Jaising said that India has seen outflows of almost $2 billion, while Korea and Taiwan have seen inflows of the same magnitude, and China, too, has seen inflows.

"So, just because valuations in India touched 100% premium to emerging market, despite the correction, we are still at about 70-75% and not yet over the woods on relative valuations, or people filing meaningful money in other parts of the world," he said.

According to him, the best performing currencies last year were the Rouble against the U.S. dollar, as opposed to their current status, where they have been the worst performing currencies over the last two months. Dollar index has contracted almost 15% from the 115 level, he said.

Unfortunately, India at Rs 81-82 against the U.S. dollar "has moved nowhere" in the last two months, he said. "Last year where valuations looked compelling and there was hope of bouncing back to normalcy has changed track this year."

India specifically doesn't look attractive in terms of valuations, but the next 12 months could see 10-12% of absolute upside and 5-10% downside, he said.

Demand growth in the metals industry could incrementally rise from China and the raw material costs dwindling could hint at better margins, Jaising said.

However, the balance sheets of most Indian companies are better in the commodity space than metals, he said.

"We are grossly overweight in the 'Make in India' story, which includes some specialty chemical and pharmaceutical names."

In the financial sector, they are overweight on private banks due to "fantastic loan book growth", and in some public sector banks, the results have been "fascinating to say the least", he said.

This exciting loan book growth is largely being seen in the retail sector as compared to the corporate sector at present. "We are underweight on NBFCs and I.T sector," he said.

Jaising said that they are in favour of "small and mid caps" in the pharma space, though not the large caps.

As interest rates rise, platform businesses where profit growth cannot be seen two to three years ahead despite tempting revenues, should be avoided, he said.