India likely to outperform among EMs; Dec quarter may see fewer disappointments on earnings than H1: Manishi Raychaudhuri, BNP Paribas

In an interview with ET, Raychaudhuri said the October-December quarter may see significantly fewer corporate earnings disappointments than in the first half of 2015. Edited excerpts:



ET: Is selling by GEM (global emerging markets) funds showing signs of subsiding?

Manishi Raychaudhuri: We think the withdrawal of funds from emerging markets and reallocation to developed markets (DM) could continue for some more time. However, the valuation gap between EM and DM has diverged so much that the pace of this reallocation may slow down.



ET: What is your outlook for India’s markets for the rest of the year?

Manishi Raychaudhuri: We are overweight on Indian equities in our Asian model portfolio. On a relative basis, we think India is likely to outperform as it offers a scenario of recovering growth and declining cost of capital, which is rare to find in EM.

India is also relatively protected from China slowdown and benefits from the broad-based weakness in commodity prices.



ET: When do you expect corporate earnings to revive?

Manishi Raychaudhuri: Corporate earnings in some segments such as industrials, PSU banks, and some pockets of autos shall take time to recover. Materials sector earnings could remain depressed for much longer.

However, consensus earnings estimates have been adjusted downwards to such an extent that meeting those beaten-down estimates may not be a tall order. We think the October-December quarter may see significantly fewer disappointments than in the first half of 2015.



ET: Are you seeing a improvement in sentiment post the RBI rate cut?

Manishi Raychaudhuri: The rate cut recently effected by RBI came as a positive surprise to the market, in particular, because the commentary surrounding it was not hawkish. We believe sentiments about financials and select industrials shall continue to improve in the near term, though for an actual pick-up of the investment cycle we may have to wait till the second half of CY2016.



ET: Do you see the Fed hiking the rate this year? How severe is the economic situation in China?

Manishi Raychaudhuri: Our house view is a Fed rate hike in December 2015 with a 60% probability. The economic slowdown in China (particularly the slowdown in manufacturing and FAI) is exerting severe pressure on EM economies and a few DM economies, particularly those who export raw material and finished products to China. The EM commodity exporters (Brazil, South Africa, Indonesia etc.) and a few European exporters (e.g. German auto exports) are affected.



ET: How would you rate government and its policies so far? Do you agree with the criticism that the government has not lived up to the expectations?

Manishi Raychaudhuri: The government has achieved a few important targets. However, on the legislative front, a greater degree of political sagacity on the part of the ruling combination could have helped faster passage of key bills.