JP Morgan is underweight these sectors

Adrian Mowat is the Chief Asian & Emerging Market Strategist at JP Morgan. In a recent conversation with CNBC-TV18 about his views on Indian equities he was positive about emerging market equities in general and Indian equities (EPI) in particular,  but there were aspects about the latter that concerned him.

In terms of sectoral allocation towards India, JP Morgan is underweight information technology, healthcare, and consumer staples.

The reason for the negative stance

The negative view on the first two sectors is due to the risk to Indian companies emanating from US policy. With the present administration viewing outsourcing as hurtful to US interests, technology companies in India like Infosys (INFY), which procure a major chunk of their business from the US, will find their revenues under pressure.

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Indian healthcare companies, specifically those in the pharmaceutical industry like Dr. Reddy’s Laboratories Limited (RDY), have been kept on the Priority Watch List in the 2017 Special 301 Report by the US Trade Representative. This is due to worries about intellectual property and high tariffs and taxes on medicines, among other issues.

Further, a protectionist stance on medicines being exported to the US have put Indian pharmaceutical companies under pressure. With 40% of the revenues of the top four Indian drug manufacturers coming from the US, worries on import regulations hang heavy on their revenues.

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As far as consumer staples is concerned, JP Morgan does not see exceptional growth from the sector.

Neutral and overweight on these sectors

The firm is neutral on Indian financials (IBN) and consumer discretionary stocks, the latter because of uncertainty of the impact of goods and service tax (GST).

Meanwhile, it is overweight on building materials, some petrochemical companies, and real estate.

However, Mowat says that high valuations in the aforementioned cyclical sectors cause the firm some “discomfort.”

Fund flow trends

US investors investing internationally have displayed affinity towards Indian equities this year. India-focused ETFs listed on US exchanges have attracted inflows to the tune of $210 million in YTD 2017. Meanwhile, in the past one year, flows stand at $181 million.

These numbers are small compared to Brazil-focused ETFs, but are much better than Russia-focused ETFs, as shown in the graph above.

Macroeconomic prospects put India in good stead among emerging market investment destinations. However, stretched valuations may be the biggest roadblock for Indian equites in attracting further inflows.

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