Bernstein bullish on Asia; cautious on smallcaps in India

Rupal Agarwal, senior research analyst–Asia quantitative strategy at Bernstein, spoke to CNBC-TV18 about their cautious view on small-caps on the broader market in India.

Bernstein is closing out its long value and smallcap calls in India and going forward, it’s becoming bullish on quality stocks.

Agarwal said, “When we see early parts of global recovery, that really works in favour of these cyclical stocks in India, which are more value and smallcap names. But we have now moved more from those early parts of recovery to more mid-cycle recovery, and that is providing a limited macro support for these names.”

She added, “At the same time, we are seeing economic recovery slowing down broadly in Asia and historically, we have seen that value and small caps don't do well during these macro regimes. On the other side, we find quality names in India doing much better. So, from a macro perspective, we are clearly in a stage where we are we are seeing limited support for these cyclical names.”

On sector specifics, Agarwal said, “When we look at quality, there are a few aspects we look at, a blend of return on invested capital and balance sheet quality. So, that is our preferred measure of looking at quality names. If I look at from a sectoral angle, we will have, of course, a lot of staple names, few discretionary, some metal names, not a lot of IT though we still have Infosys in the portfolio, but not a lot of IT in our quality portfolio.”

On emerging markets, she said, “Overall, we still remain bullish on emerging markets, especially Asia. But we do believe that this is a time to be quite selective. In emerging markets, of course, one of the key markets is China; China has been under pressure because of a lot of regulatory concerns, but we still believe that there are opportunities within Chinese markets. So, that is our key positioning that one can still continue to add more risk from an emerging markets perspective. But the selection needs to be very particular, specifically more, within the Chinese context, more in the older economy side of the market, which are less likely to see regulatory concerns, compared to the newer economy side, or high growth market, which has continued to see a lot of regulatory scrutiny.”

On the healthcare sector, she said, “We do believe that healthcare is one of the key quality sectors in India, but we have already seen quite a bit of price action within healthcare and that is why you see that within our portfolio, we don’t have a lot of healthcare names. We are looking at these neutral zones in the market, mainly companies which have just not been doing well in the last one month or have not gained a lot of momentum, but will start getting that traction in the next 1-12 months, so that is basically the key idea.”