Herald Van Der Linde, Head-Equity Strategy, Asia-Pacific, HSBC understands the reason why Asian equities will see a decent growth this year. In an interview, he said the bull run will continue for a while more, although US rate hike fears will cause multiple scares through the course.
He says equity valuations and price earnings ratios are likely to remain static but corporate earnings growth can drive Asian equities higher by about 7 percent this year. “India can do even little bit higher than that, but I also think it will come with an increasing amount of volatility.”
Below is the transcript of Herald Van Der Linde’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: We went through growth scare; on hindsight it looks to be a minor scare. You think for the next months we are going to see good flow into equities as an asset class?
A: We are looking for about 7 percent upside in Asian equities throughout the year and probably for India even little bit higher than that but I also do think that it will come with an increasing amount of volatility.
We have seen about couple of scares; some in October, then late November and early December and now a couple of days ago. The key thing here is that the market needs to digest that interest rates in the US are going to go up. You might say we have been talking about this for four-five years but if I look at the Fed from future, they are not fully pricing this in yet. Over the last couple of weeks we have seen that they started to price this and this is one of the key causes of the decline in the last couple of days. As we progress, we will see more of these scares and volatility coming.
Sonia: I was going through a note that you have written where you have said that bull market tends to end either with euphoria or with something going badly wrong. Do you see any of this play out in the horizon in 2015?
A: A bull market run typically ends up in either euphoria or something going completely wrong and this bull market which we are now seeing is well for five years now, is well beyond the average timeline of any bull market. We have seen longer bull markets in history but not too many. I got to go back to 1947 to find another one for example, but do I see signs of euphoria in markets? Not really yet. Valuations are not unreasonable. They have been pricey but now unreasonable and if I look at sentiment indicators, they are not in euphoria territory yet. So I do not see that.
On the other hand do I see something going terribly wrong? As long as interest rate remains where they are they, we do not see the Fed making a mistake by, for example raising interest rates too soon and finding out later that the economy was not able to digest that. I think in that case I do not see that particular scenario either. What does that mean? It means to me that probably equity valuations, price earnings ratios will not move that much higher and the corporate earnings growth is going to drive these equities higher and that is for us about 7 percent this year, so net-net that is the upside we see in Asian equities as well.
Latha: You speak of an upside in Indian equities but over the month of December we saw about USD 1.5 billion move out. The last couple of days have seen fairly heavy FII selling. Why that?
A: I think a stronger dollar is a general worry in the emerging markets. You can put a lot of these things together. India is a high PE market aside from Philippines, the second most expensive market in the region. So, Indian equity market is susceptible to that volatility quite a lot because valuations are relatively high. Does that mean you got to be careful with Indian equities? In a sense yes. But I do think that the outlook on 12-month basis still continues to be rather okay for India — pretty decent earnings growth coming through, consensus looking about 11 percent, the risk to that is very low and PE levels probably stay where they are. So, we are going to see more volatility in Indian equity market on the back of what happens either in emerging markets like Russia, Brazil or what happens in the US or Europe. But overall we are going to end up higher by the end of the year than where we are at the moment.