India Tilts Towards Earnings Recovery
As consumption resumes in India and companies shore up their margins, Portfolio Manager Peeyush Mittal sees reasons for optimism for corporate earnings.
A Conversation with Portfolio Manager Peeyush Mittal, CFA
What should investors expect from Indian equity markets in the coming months? Portfolio Manager Peeyush Mittal, CFA, shares three reasons why he's optimistic about India's economic recovery and discusses the unfolding earnings recovery.
What is the current state of COVID-19 restrictions in India?
Overall, developments around the pandemic are encouraging. India's health situation has meaningfully improved in recent weeks. The daily number of new cases has been nearly halved, declining from a high of approximately 90,000 a day in mid-September to fewer than 50,000 at the end of October. More importantly, active cases as a percentage of total cases has been steadily declining—a welcome improvement that reduces the burden on the health care system.
As a result, restrictions in large urban sectors are gradually easing and we are seeing near-normalization of mobility and economic activity. For example, restaurants and bars in Mumbai were allowed to open in early October.
What is on the horizon for India's economy over the next 6-12 months?
I am fairly optimistic that economic growth in the next 6-12 months will be faster than consensus expectations for three reasons. First, the government's fiscal situation is far better than anticipated. Direct and indirect tax collection has normalized more quickly than expected, which is fueling a recovery in the government's infrastructure spending.
Second, high-frequency indicators are suggesting that the economy is back to 95% of its pre-COVID level. We have seen swift improvements in September and October that are likely to carry through into November and December. Specifically, the October reading for the IHS Markit India Manufacturing Purchasing Managers' Index was 59, the highest reading in more than a decade.
Third, credit quality in the financial system appears to be far better than anticipated. Consequently, banks' willingness to disburse credit into the economy is greater today than a few weeks ago. I expect credit growth in the second half of the year to be stronger than the first half, which will help normalize the economy more quickly than projected.
India's economy is becoming increasingly dynamic in areas such as digital communications and online platforms. What's behind the push toward e-commerce?
COVID-19 is driving a tremendous acceleration in the adoption of internet and online commerce in India. Whether it's consumption of goods and services or content in the form of games and media, we are seeing rapid adoption. This has provided economic scale to many digitally native platforms and businesses in India, allowing them to now be self-funded rather than dependent on external capital. Additionally, some of these digitally native platforms are planning to seek public listings starting next year, which is creating excitement that is likely to increase in 2021.
India's markets are still down slightly year to date, but have strongly rebounded since the start of the pandemic. What's driving sentiment?
It's important to first acknowledge that the central bank has supported the economy with a fairly easy monetary policy in the last six months. With regard to the second-quarter move in equity markets, we largely attribute it to investors' recognition of the lower cost of capital and consequent assignment of higher multiples to earnings, even though the near-term outlook was actually challenging. In the third quarter, high-frequency economic indicators continued to improve in step with a continued rally in equity markets.
What is your view on current market valuations?
Looking at headline P/E multiples today compared to historical averages over the last 10-12 years, you may think the market today is 20-25% more expensive. If, however, you adjust for the lower cost of capital, you would find that valuations are not as rich today—and, if anything, might be 15-20% cheaper. Valuations have downside support, even if earnings growth lags behind the anticipated pace.
What is your forecast for a recovery in corporate earnings?
India is sitting at the cusp of an earnings recovery. The overwhelming majority of companies are delivering earnings in excess of expectations; too many companies to count have taken prudent cost-cutting measures to shore up margins. There were some concerns around the financial and consumer discretionary sectors, but from what we have seen so far, it seems we are in for a big positive surprise.
Peeyush Mittal, CFA,