Market not pricing in earnings recovery for a few quarters: Jonathan Schiessl

There may not be an end to the earnings downgrade cycle, says Jonathan Schiessl, CIO, Ashburton Investments. He is somewhat not comfortable with the valuations of the staples sector. Schiessl spoke to ETNow.

Edited excerpts:

What is your view on the flows to emerging markets, particularly India at the moment? Do you see them improving over the rest of 2019?

Yes, flows to India from foreign investors have been disappointing for the last few years after fairly significant flows a few years ago. Emerging markets became a consensus trade among foreign investors during a very short period, particularly from the developed markets perspective.


Obviously, with the changing course of the Fed and US interest rates as the backdrop, we have the allocations going up generally to emerging markets. But obviously, China remains the key to that particular puzzle for serious foreign flow to EMs and there are still question marks about what is going on in the Chinese economy. Obviously, the key point is whether there can be some sort of deal between the US and China trade.

I would say there is a good chance of some sort of deal happening and therefore, the emerging market space will continue to attract capital flows.

Looking at India particularly, most foreign flows will probably stay on the sidelines, they want to see what happens in the upcoming election and quite frankly, they want to see proof of this earnings recovery that has constantly been talked about but quite frankly has been delayed for some time.

What is your market approach? Are you buying at the current levels and if so, what areas are you nibbling at?

To be honest, we have not done anything too aggressive. We have moved out of a lot of midcap names that we were previously in waiting to go back into. At the moment, it does not feel like there is a rush to do anything.

Obviously, with the volatility that we are expecting around the election coming up, we are in a reasonably volatile time globally. Holding a bit of cash is no bad thing at the moment. We have been sitting on the sidelines a little bit waiting for markets to come off and then start deploying a bit of that cash.

Your overweights and underweights, let us talk about them in the Indian markets. What are you finding expensive, what you are finding possibly cheaper valued at this point of time?

Yes, our big overweights have always been for some time financials and I still think financials is a great way of playing the India story as such. Corporate banks continue to obviously look pretty good to us and big private sector banks will do very well in the period ahead.

We are quite underweight on the NBFC space, we only have one exposure in that area. There will be more stress as time goes on in that space. The other area would be consumer discretionary, obviously the recent Budget is quite pro consumption, the issue there I guess is valuation and we are very underweight actually on the staples sector. I got to say that is a call that has not particularly worked.

We have looked at the valuations in that space and I just cannot get my head around some of the valuations if I am honest. They are great stories and growing reasonably well, but still very punchy valuations particularly again when you look historically what that sector has traded at and on a relative basis versus other staples sectors globally and in emerging markets.

And we remain quite underweight on the energy space as well. Yes, they are main underweights. In the short term, we are a little bit more defensive. We have taken on some slightly higher dividend yield stocks and slightly less volatile stocks just while we navigate over the next 3-4 months.

What are the prospects for markets based on earnings, say for the next 3-4 quarters?

I would still think the market is not pricing in the potential recovery for a few quarters. If you look at earnings and perhaps the sell side, probably in the short term it needs to come down a little bit in some of their estimates. So, we probably have not seen the end of the downgrade cycle.

However, I do think when you look at various correlations on various measures, this economy can surprise to the upside and therefore, we are quite optimistic that the actual earnings outlook will actually start improving a few quarters down the line. In the short term, probably that is unlikely to happen but certainly after four or five quarters, the story actually gets certainly better.