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Positive on India, thanks to earnings, reforms speed: UBS

The Indian equity market looks like “on the best investments in Asia” right now and UBS is overweight the country, according to Hartmut Issel, the firm’s Head Equity & Credit for Asia Pacific and Chief Investment Officer for Wealth Management.

In an interview with CNBC-TV18’s Latha Venkatesh and Sonia Shenoy, Issel said earnings growth and reforms momentum in the Indian market were two of the key drivers of UBS’ bullishness.

“India has somewhat demanding valuations in the mean time, but I think they can keep it up,” he said.

Below is the transcript of the interview on CNBC-TV18.

Sonia: I know you track the Indian markets very closely as well, so just give us a bird’s eye view of what foreign investors are doing with India now. Are they increasing their participation because the reform momentum is picking up? Or do other pockets across Asia look like a better investment now?

A: India looks to us like one of the best investments. We are overweight on India in our Asia strategy and I can see two reasons. First reason is actually really just the fundamentals before we even start talking about reforms. India has incidentally also over the last couple of years already consistently given better earnings growth than Asia overall. We expect it to continue not withstanding that the most recent earnings season was a bit weak.

Now, coming to reforms and here this is crucial because we have to acknowledge that from a valuation point of view India is no longer really cheap. India has somewhat demanding valuations in the mean time, I think they can keep it up. But, what has to happen now is really the legislation of things like land acquisition bill and goods and services tax (GST) has to be successful.

I think that can sustain the valuation because we will not see frankly a bulk of these measures for probably the next two years, we will not see anything really in the numbers but it can help us get the conviction that we are on the right track to achieve for the longer term better growth numbers and low inflation.

Latha: It is good you touched about earnings if the rest of Asia thinks that our earnings look better than others, in India itself it has created a lot of despondency, the third quarter earnings in particular. Fourth quarter earnings will start next week. Are you expecting them to be any better at all? Which is the inflection quarter for earnings growth?

A: To be very honest, I do not expect most recent quarter or the current earnings picture to be dramatically better. It will still be a little bit soft and I do believe that as long as the legislation works, it will not matter. But let us look a little bit more in detail because what matter to investors, it does not matter so much whether the most recent quarter was not so strong.

The question is that is there reason to be more optimistic? And here maybe a couple of thoughts I have on that. One weakness we have seen out of the energy or specifically oil sector of India of course, now that is unlikely to go away very quickly with current oil prices. But we do see a recovery of oil prices, a minor reversion, if you will towards the end of the year.

The second factor is my view the absence typically India is one of the more export sensitive market, so about a third of the Nifty sales actually go abroad. So, it is not really domestic. And in the past couple of years, they have benefitted from an increasingly weaker or softening rupee with we are currently not seeing. So, we are not seeing this as a tailwind, probably that tailwind will not necessarily return but volume-wise, if I think a pharma, also IT or indeed the vehicle producers that are exporting, the volume numbers will still be reasonably strong.

The biggest impact, I would argue and also incidentally the biggest sector of course in the market is financials and most all banks. And here the big disappointment was that people expected the asset quality, the loan book quality to already improve visibly and that of course has a very strong impact on earnings. Now that did not happen, however I do not think that should lead us to believe that will never happen.

Maybe we need another quarter or two, but it will happen. I also see a couple of encouraging measures more lately also the pooling of gas prices for the stranded projects. It is about six percent of India’s defaulting loans or stress loans right now are in that segment. So, if piece by piece you are chipping away, you will eventually see it and as long as that comfort remains, India can perform.

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