Opportunities in equities make India interesting | Economic Times

Investors should be realistic about return expectations from global equities, and a dollar investor should expect 5% from global equities, said Joe Little, chief global strategist, HSBC Global Asset Management. In an interview with Prashant Mahesh, Little said equities are well placed compared to bonds. Edited excerpts:Where does India stand in your list of global markets?I am reasonably enthusiastic about the Indian market. I think the positioning on the rupee for an international investor is interesting and there is scope for appreciation. News will be supportive and constructive for Indian economy and markets after the vaccine delivery. We might have to wait a bit of time and be patient and it may be a second-half-year story compared to a first-half story due to number of challenges. Rupee’s strength and attractive opportunities in fixed income and equities make it an interesting market. It also benefits from not having seen rapid appreciation as compared to what North Asian equity markets have seen.Where are global investors allocating money now?I will be overweight equities and alert to any challenges. There are some concerns over valuations and treasury yields. It would be wrong to dismiss them entirely. I want to be positive on recovery trade and restoration; it is risky not to be positive equities at this time. I would be positive on international equities like EMs and laggard markets like Europe and a bit cautious on the US. I would be wary of global government bonds as yields are low and returns will disappoint. Ability of many government bonds to hedge portfolios and perform when equities are weak is not a certainty. EM and Asian fixed income, Chinese bonds, South Asian bonds including India, Indonesia are important for me.How do you expect equities to play out in 2021?We can see a continued phase of economic restoration playing out in 2021 linked to the vaccine and its delivery. I am reasonably optimistic for the global economy and it will just take some time to get off this big economic shock.Global stock market capitalisation is now 120% of global GDP. Are valuations stretched?Conventional valuations matrix gives a sense that equity pricing has become quite rich. What we miss is how do equity valuations look relative to other asset classes that investors can own? The environment of lower interest rates and lower for even longer interest rates is an important element in the analysis to think about. There is a clear sense of forward guidance from systematically important central banks that interest rates will remain low not just this year but for the foreseeable future that has significant implications about what we think of equity valuations. This does mean that we should expect equity markets to trade at higher PE ratios than we have typically seen when at higher interest rates.What kind of returns could investors expect from equities?I would urge investors to be realistic about return expectations for global equities; we should expect 5% from global equities in US dollar terms, but if you compare that to what you can achieve in global government bonds, equities are still well placed. I am not yet convinced we are seeing a bubble in equities or irrational exuberance in the investment markets but I do think that after last year where economic, corporate fundamentals were deteriorating and equity pricing was moving higher, we need to be realistic about what we should expect from equity markets in 2021.