ETMarkets Smart Talk: The Indian market will provide the best opportunities for entry in the next6-9 months. Ritu Arora.

"The yield from stocks at5.0% is incomparable to the yield of10-year bonds at7.35%. At the same time, the market capitalization to GDP ratio of India stands at106%, exceeding the long-term average of around80%. We believe that the Indian market may correct further and provide better entry opportunities in the next6-9 months," says Ritu Arora, the Chief Executive Officer and Chief Investment Officer of Asia, Allianz Investment Management Singapore Pte Ltd.

In an interview with ETMarkets, Arora said:

“We expect that interest rates in India and the USA will remain stable this year, with no further increases. A reduction in interest rates will begin next year in the second half of the year.”

Extracting quotes:

• The Indian market seems to be consolidating after reaching a peak in September, mainly due to global factors. What is your opinion?
• Japan, the USA, India, and Taiwan have become some of the most successful markets this year. In the Indian context, NIFTY has grown by about 7.5% year-to-date, while mid-cap and small-cap indices have surged by an impressive approximately 30% during this period.
• The price of mid-cap stocks at a level of 24x forward PE is at a premium compared to large-cap stocks, while small-cap stocks at around 20x PE are at parity. This significant overvaluation of assets in the equity class takes into account the steady growth and favorable macroeconomic conditions in the Indian economy.

However, the recent correction/consolidation in the markets is the result of several factors, the main one being the sharp rise in interest rates in developed countries, especially in the US, where the 10-year yield has increased by more than 50 basis points in the last month and nearly 100 basis points in the last 3 months.

The slowdown/moderation of growth that is already occurring in developed countries is impacting the domestic economy and emerging markets with some delay.

In the last two months, foreign investors have pulled out nearly 50,000 crore rupees (6-7 billion USD) from Indian stock markets due to the aforementioned factors.

The same situation has arisen in other Asian stock markets, such as Singapore, Japan, Taiwan, Thailand, Malaysia, and others.

Stocks of mid and small capitalization have mainly experienced profit-taking after a sharp rise over the past 6 months, while large-cap stocks have remained mostly stable.

Having said all of the above, we are long-term investors and believe in the sustainable potential for long-term growth of the Indian economy and markets, despite short-term volatility.

We prefer high-quality businesses with strong advantages and healthy balance sheets that should continue to thrive.

The rise of the dollar index and U.S. bond yields (at a 16-year high) is impacting stock markets not only in India but around the world. Although we are not heavily reliant on foreign investors, this could affect Indian markets in the near future and trigger a price correction.

In the past two years, the USA has witnessed an unprecedented increase in interest rates (525 basis points). 10-year bonds have reached a level of 4.75% and represent very attractive assets.

Despite the sharp cycle of interest rate hikes, the American economy remains strong and has added 40% to its GDP ($7.5 trillion) since the pandemic. Therefore, money is likely to continue flowing into the U.S. as investors take advantage of a combination of higher rates, a resilient economy, and a strong currency.

Developed markets such as Europe, the UK, and Japan (stocks) also present attractive investment opportunities.

The flows of foreign direct investment (FDI) are significantly correlated with the aforementioned factors. As a result, we observed an outflow of FDI from India in August and September 2023.

However, it is worth noting that domestic institutional investors (DIIs) have invested over 130,000 crore rupees in the Indian stock market over the year, more than offsetting the outflow of foreign institutional investors (FIIs).

However, considering the relative valuation and outstanding performance, stock markets may "temporarily correct." Global interest rates are likely to stabilize and ease in the future, and global growth may hit a bottom in the next 3-4 quarters.

The Indian stock market with high growth will once again present relatively attractive investment opportunities. This will significantly help attract capital into Indian stocks.

Although the rupee has weakened against the US dollar in recent weeks, the INR has been much more stable than in previous years.

This year, the INR has fallen by less than 1% against the dollar. In 2022, it decreased by about 10% against the dollar.

The performance of the INR against the USD has been much better than that of its Asian counterparts, which adds to the attractiveness of Indian markets.

What is your opinion on the outcome of the Monetary Committee meeting? What trajectory do you expect for interest rates in 2023?

The results of the Monetary Committee meeting align with our expectations. The Reserve Bank of India kept the rate unchanged at its current meeting and maintains its stance on exiting accommodative policy. The delay in previously adopted policy measures and cumulative monetary tightening should allow rates to remain stable, unless there are significant positive surprises regarding inflation.

Inflation is generally under control, and there is no need for further rate hikes. At the same time, growth is strong enough to eliminate the need for rate cuts. Therefore, the next few meetings of the Monetary Committee are unlikely to be very significant.

The Federal Reserve System of the United States has aggressively raised rates from 0.25% to 5.25% over the past two years. Asian central banks are following the Fed's lead and raising rates to balance capital flows and currency stability. Further aggressive rate hikes by the Fed may no longer be necessary.

In the future, the decisions of Asian central banks regarding pauses or rate cuts will largely be determined by signals from the Federal Reserve, domestic inflation, and economic conditions.

Many Asian central banks (such as India, Malaysia, Indonesia, Taiwan, the Philippines, and others) have already halted interest rate hikes.

We expect that interest rates in India and the US will remain stable this year, with no further increases. Rate cuts will begin next year in the second half of the year.

Some macro indicators, such as the BEER indicator and the market capitalization to GDP ratio, suggest that we are in an expensive zone - what is your opinion?

The valuations of Indian stocks, while not very expensive, are also not cheap with a 20 times forward PE ratio compared to a long-term average of 18 times. These PE multiples may not take into account the slowdown in growth in the near term.

India remains the most expensive stock market in the region and one of the most expensive in the world.

The sharp rise in the yield of 10-year bonds over the past 6 months (an increase of 45 basis points to 7.35%) and the growth of stock markets during this period have made fixed-income investments relatively more attractive.

The 5.0% return from stocks does not compare to the 7.35% return from 10-year bonds. At the same time, India's market capitalization to GDP ratio of 106% remains above the long-term average of around 80%. Therefore, we believe that Indian markets may correct further and provide better entry opportunities over the next 6-9 months.

What to expect from Indian companies in their third-quarter reports?

We truly believe that the growth of India and emerging markets will slow down with a delay and will impact corporate profits in the coming quarters.

Although this may dampen the mood in the short term, it should prompt long-term investors to look beyond quarterly profits and focus on interesting investment opportunities available at reasonable valuations.

From the perspective of long-term strategic asset allocation, we expect that the combined annual growth rate will be