Indian market to be world’s 3rd by 2030

Timothy Moe
Goldman Sachs

Timothy Moe, chief Asia-Pacific regional equity strategist of Goldman Sachs, is responsible for communicating his views to the firm’s institutional investor base. In an exclusive interview with Ravi Ranjan Prasad, he said the share of emerging equity markets in the global equity market is going to rise very significantly over the next 20 years, and India will play a very strong role in the shift. Excerpts:

n What are views on foreign inflows to Indian market in the New Year?
The developed world’s institutional fund managers, which are basically pension funds, insurance companies and mutual funds, chronically and structurally still have an underweight exposure to emerging growth areas of the world. Today, you can see a very strong and secular trend of money flowing from developed market’s asset managers to emerging market equities. This may fluctuate from time to time, but overall the trend will continue over the longer term and is a very positive one.

n What are your perspectives on growth for Asia region in 2011?
Goldman Sachs sees 15 per cent earnings growth for Asia based on our top-down analysis. We also expect a roughly 1 – 1.5 point increase in the price/earnings ratio, which is about a 10 per cent improvement in valuations. The combination of those two factors leads us to expect a 20 - 25 per cent increase in prices. If a 3 per cent dividend yield and some currency appreciation against the US dollar is added, we could even see up to a 30 per cent overall total return to the region next year. This is more likely to take place towards the second half of the year compared with the beginning due to the need to tighten macro policies to combat inflation in the nearer term. In the beginning of the year, in terms of market performance, we see the northern part of Asia, including countries like Taiwan, Japan and Korea, outperforming the southern parts of Asia, namely Asean markets and India.

n Can you elaborate on Goldman Sachs’ views on Indian market for 2011?
Two quarters ago, we lowered our view on India to underweight and that is something that has played out during the last quarter. Our tactical and more conservative view on the market basically revolves around valuations, and also to some extent cyclical issues. Our underweight view on India is not so much of something being wrong with India, it is more the question of the underlying positive story being discounted by a very strong appreciation in the markets, which have caused valuations to go up to quite high levels.
A review of data has shown any time the Indian market has reached more than a 25 per cent premium in valuations to the rest of the region, the following two quarters have tended to underperform. If the market goes to the level of 40 per cent above the regional valuations, then historical evidence shows it has tended to underperform to a reasonably significant degree. Consequently, when June 2010 India got to above a 40 per cent premium to the region, we lowered our stance on India to ‘underweight’. In addition to high valuations, we also note that listed companies have been reporting earnings below consensus forecasts for the past two quarters. Moreover, we note a range of macro concerns, such as inflation pressure, a large fiscal deficit and a rise in India’s current account deficit to over 4 per cent of GDP.
Most importantly though, all these factors are cyclical in nature and do not structurally impair the underlying strong growth fundamentals India clearly possesses.

n How will emerging markets fare vis-à-vis global markets?
Overall, the share of emerging equity markets in the global equity market pie is going to rise very significantly in the next 20 years and India will play a very strong role in the shift.
In terms of global projections, we believe by 2030 China will be world’s largest equity market, the US will be number two and India will likely be number three. Consequently, we are optimistic about the overall longer-term structural growth potential for India. Overall, our full year target for the Nifty is 6,800, which is about 15 per cent increase from the present level. So even though we are underweight on India, we still hold quite a constructive full year view. However, our anticipation is returns are likely to flow in towards the later part of 2011 as opposed to the beginning.

n How does Goldman Sachs view Indian equities? any sector-specific views?
If you look at Indian software stocks, we are looking for positive surprises in earnings and I think there are decent candidates for overweight positions within the market. Additionally, given inflation is an issue, we will be looking for upstream stocks in steel and energy sectors, which may benefit from rising commodity prices. The third area is infrastructure, where we have a long-term structural view and there are specific ideas, which appear quite compelling due to their growth prospects and valuations.