Daniel Needham, president and CIO of Morningstar Investment Management, chats with Prashant Mahesh of Economic Times. Below is a very short excerpt. The detailed interview can be read here.
Stock indices of 26 out of 30 countries are at all-time highs. How do you explain this?
Right now, globally corporate earnings are improving and interest rates are low, which is creating positive sentiment in markets across the globe.
Cash rates are low, bond yields are low and investors are forced to take risk to get return and liquidity is driving the markets. Give this environment, they can head even higher over the short term.
If we look back at early 2016, earnings of energy companies were weak, as were earnings of European financial companies. However, over the past 12 months, we have seen a good recovery in corporate earnings in emerging markets as well as European markets, and more importantly earnings revisions are happening which is very positive.
If we look across markets, we see stocks are overpriced. There are two things driving stocks.
Firstly, corporate cash flows are strong and improving across the world, so earnings are likely to improve. Hence, be it profit margins or return on equity, in major markets globally you find it is higher than it has been historically, especially in the U.S. markets. However, when you think of long-term valuations, prices are high, relative to what normal earnings are likely to be.
Indian stocks too have run up since the start of the year and are trading at all-time highs. Where will the market move from here?
Valuations of Indian stocks are somewhere in the middle when we look at them from an emerging markets’ perspective. They are overpriced but not as much as the U.S., and will outperform U.S. stocks over the next 8-10 years.
Large-cap Indian stocks are more attractive than mid- and small-cap stocks in terms of valuations.
If you look at an environment where cash rates are zero in the U.S. and on the negative side in Europe, Indian bonds are pretty attractive for a global investor.
Sentiments are positive in India, people are expecting increased focus on infrastructure. They are keeping a close eye on progress.
The consensus is that things are improving in India and at a much faster rate. Modi is tackling difficult problems. He could soon have both houses of Parliament and markets are waiting for that.
