Indian equities have soared ever since the new government, led by Prime Minister Narendra Modi, came into power with a clear mandate, which global investors believe will help him drive vital reform initiatives.
Banks to benefit
Leon Goldfeld, director of investments at Amundi, said he finds his best investment ideas emerging in the financial sector.
“Within India, we are comfortable with the market overall. The biggest preference is still in the financial sector, particularly banks. We see opportunities there because the reform programme will help the Indian banks more than some of the other sectors.” Goldfeld said.
He added that his firm's exposure is "a little bit light" in some sectors such as materials and consumer discretionary, where companies look expensive.
Market too buoyant
In terms of the risks, the market has run up too far and is moving ahead of the reform process, he said.
“That is a real risk. It is a question of timing. The market could easily see some disappointments. The state budget [announcement] will be the next key event.
“We think the Indian market could pull back if there are some disappointments, but we don’t think it is going to pull back substantially.”
Goldfield said that in a 12-18 month view, the potential for further economic growth and a possible interest rate cut by the Reserve Bank of India make equities attractive.
Global investors have been expecting a series of reforms from the new government, including opening up the Indian economy for foreign direct investments, implementation of the goods and sales tax act and state support for the manufacturing sector.
Low returns from Asia
In rest of Asia, Amundi is also overweight Chinese equities. The firm also sees opportunities in Korean and Taiwan technology companies.
Asian equities should deliver a return of around 10% in 2015 due to positive contribution from moderate earnings growth, supportive valuations and dividend yields, offsetting a headwind of modestly depreciating Asian currencies, the firm said.
While the US dollar will continue appreciating in 2015 against most major currencies, Amundi said there are no macro indicators suggesting significant vulnerability in any of the Asian currencies.
Earnings of Asian companies are expected to expand by 10% in 2015, slightly more than in 2014, as operating margins benefit from the fall in commodity prices.
In terms of valuations, Amundi said price-to-earnings multiples for Asian equities fell from a level of 16x in 2010 to 12.7x as at the end of 2014. For Asia as a whole, current market valuations are at a 25% discount to the average of the past 30 years.
“Despite valuations being inexpensive, we do not expect a positive re-rating for Asian equities,” the firm said.
For 2015, Amundi sees the prospective dividend yield on Asian equities at 2.8%.
“It is quite feasible that the returns from dividends will be even better than that. Korean corporates, which traditionally paid out very little dividends, are expected to boost their dividend payments as part of the process to enhance shareholder returns.”