It's A Tricky Time For Indian Equity Valuations, Says JPMorgan's Sanjay Mookim
India's "pro-business" policy changes have helped the country compete favourably with peers, JPMorgan's Sanjay Mookim says.
This is a tricky time from the perspective of valuations in Indian equities, according to Sanjay Mookim, head of India Research at JP Morgan.
"One is unlikely to make too many returns on entering the markets at this point," he said. The fear for India is not that the economic cycle will disappoint in the long term, but that the Indian markets are "creating their own cycles through this exuberance-disappointment flipflop that investors go through".
"That's in the context of global uncertainty on liquidity and rates," he told BQ Prime. "People look at the five-to-10-year promise for India, which is real, but they try to price it in today, for every stock."
"That's a bit tricky, because not everything will do well," Mookim said.
"When you have this universal belief that every stock will be a multi-bagger and you pay less than 100x earnings for a variety," he said. "Right now, 20% of India's midcaps trade more than 50 times their price-to-earnings, which is very punchy."
"Despite this, interest levels in India are very high."
Many emerging markets, according to Mookim, are going through greater challenges than India. China has struggled with keeping Covid-19 out, he said, while there's a tech downcycle impacting South Korea and Taiwan.
"India has done better in many aspects, such as Covid-19 that turned out much better than feared for a poor, growing country," he said.
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Given the tough growth environment for emerging countries, Mookim said individual companies, governments, and businesses need to undertake structural reform. "Countries will need to have indigenous factors to grow, rather than relying on a global trade cycle," he said. "They need to do things for themselves to drive growth."
Mookim expects India to possibly rank right at the top if emerging markets were to be ranked according to the amount of structural change that they have undertaken. According to him, the country's "pro-business" policy changes such as the GST, the bankruptcy code, labour laws, and real estate regulations help India compete favourably with peers.
"We are now looking at the benefits of these reforms accruing," he said. "Now after Covid-19, we should start to see the Indian economy outshine its peers on a structural basis, given the huge number of pro-business factors."
Mookim said India will remain a consumer-driven economy. "The majority of Indian consumers have been hurt by lower income visibility and reduced savings due to Covid-19," he said. "Wages are growing in nominal terms, but disposable income isn't growing as fast as it should."
"What needs to happen is for the government to start focusing on managing its balance sheet—interest cost to tax is a high ratio—those numbers need to come down gradually," Mookim said. "Let the consumer heal and start picking up the burden for economic growth over time."
At the moment, the consumer is relatively weak, and the economy continues to require government support, he said.
Mookim said for equities to move higher, the only hope is to start seeing stronger earnings growth, but not without pre-conditions. "While the government is spending, corporates are not. Balance sheets are the cleanest in years," he said. "Households are also relatively underlevered."
"If we see the nascent credit cycle sustained, we can start to see corporate and household expenditure kick in. That's when the core economy and consumer sectors start to deliver better than expected earnings growth, which could possibly argue for some equity return," he said.