Asian markets are insulated against global events
In an interview to ET, Guy Strapp said his fund is bullish on Indian companies linked to the country’s infrastructure and domestic consumption stories.
By TNN |
MUMBAI: Though not exactly cheap compared with regional peers, Indian equities still look attractive from a long-term perspective, feels Prudential Asset Management regional head of investment management-Asia Guy Strapp, who oversees assets worth nearly $64 billion.
In an interview to ET, he said his fund is bullish on Indian companies linked to the country’s infrastructure and domestic consumption stories.
Excerpts:
How does India currently fare with some of the other Asian markets in your portfolio?
The Indian market is getting attractive, it had performed pretty strongly last year, and on our regional radar, it was looking expensive. So, we were underweight on India. But India has not performed all that well this year, compared to its regional peers, and hence the value is coming back. Accordingly, we raised the country’s rating to neutral about three months ago. That does not mean it is necessarily cheap; it is still trading at a premium to Asia. But the medium- to long-term story is compelling in terms of the economic strength, demographics, the growing importance of the consumer, the ability to contain inflation as a risk, the ability to digest rise in exchange rate. All these factors are peculiar characteristics which help India insulate itself from the rest of the world, compared to another big market like China, where there are many risks. From a 5 to 10-year perspective, we would be overweight on India.
Investment gurus say the best time to avoid a market is when there is too much excitement about it.
I agree. You have to sift through the hype and excitement and take a view based on your homework and analysis. People said the Chinese market was looking frothy about a year ago, and they have still been among the best performing markets over the last 12 months. In India, many of the companies that have led the charge (on the stock market) and were looking expensive, have managed to surprise in terms of earnings growth.
Which pockets of the Indian economy would you be looking to put your money in?
We are favourably disposed towards the infrastructure story — that is something of a medium-term view — we would look at some of the hotel and construction stocks. In our regional portfolio, we are overweight on the construction sector and some energy stocks. Anything that is available at a reasonable valuation and linked to that story (infrastructure) as well as the domestic consumption story, we are overweight on it. We are underweight on Indian healthcare and banks. It does not mean that these sectors will not do well, only that they won’t do as well as some of the others.
In an interview to ET, he said his fund is bullish on Indian companies linked to the country’s infrastructure and domestic consumption stories.
Excerpts:
How does India currently fare with some of the other Asian markets in your portfolio?
The Indian market is getting attractive, it had performed pretty strongly last year, and on our regional radar, it was looking expensive. So, we were underweight on India. But India has not performed all that well this year, compared to its regional peers, and hence the value is coming back. Accordingly, we raised the country’s rating to neutral about three months ago. That does not mean it is necessarily cheap; it is still trading at a premium to Asia. But the medium- to long-term story is compelling in terms of the economic strength, demographics, the growing importance of the consumer, the ability to contain inflation as a risk, the ability to digest rise in exchange rate. All these factors are peculiar characteristics which help India insulate itself from the rest of the world, compared to another big market like China, where there are many risks. From a 5 to 10-year perspective, we would be overweight on India.
Investment gurus say the best time to avoid a market is when there is too much excitement about it.
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I agree. You have to sift through the hype and excitement and take a view based on your homework and analysis. People said the Chinese market was looking frothy about a year ago, and they have still been among the best performing markets over the last 12 months. In India, many of the companies that have led the charge (on the stock market) and were looking expensive, have managed to surprise in terms of earnings growth.
Which pockets of the Indian economy would you be looking to put your money in?
We are favourably disposed towards the infrastructure story — that is something of a medium-term view — we would look at some of the hotel and construction stocks. In our regional portfolio, we are overweight on the construction sector and some energy stocks. Anything that is available at a reasonable valuation and linked to that story (infrastructure) as well as the domestic consumption story, we are overweight on it. We are underweight on Indian healthcare and banks. It does not mean that these sectors will not do well, only that they won’t do as well as some of the others.
Will the ongoing subprime loan crisis in the US derail the rally in Asian markets?
There is less co-relation between Asia in general and the rest of the world now. I agree that the market here (in Asia) have also fallen over the past couple of weeks when the concerns (in global credit markets) first surfaced. Had this happened ten years ago at the time of the Asian crisis, the Indian market would have fallen twice as hard as the US because the perception was that there was an interest rate risk in Asia. If you look now look at the interest rates, bond yield, corporate earnings across Asia, in some instances you will find that the markets are trading at a premium to the US, while previously they were always trading at a discount. That is why I feel the (Asian) markets are now insulated against global events. So there is a scare in the US, but the Asian markets here did not move as much as Wall Street did.
What are the things about India that worry you?
We are worried about the rupee’s sustained appreciation. Political interference in policy is inappropriate; we should have a free market to the extent possible, we shouldn’t have things like artificial regulation in cement prices. It does not make sense in terms of free and fair markets, but most importantly, it scares away investors. They have all come to invest in a market with a fair degree of certainty, and then they suddenly realise that the thing they have invested in does not have pricing power. Inflation is a worry, but that is under control for now. And the other big worry, more from a strategic point, is infrastructure.
You mention rupee appreciation as a key risk. But the general view seems to be that the rupee is set to appreciate over the long term. So is not something that overseas investors looking to put money here will have to live with?
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Currency markets are always difficult to predict. Textbooks tell you that the currency markets, which have performed strongly over the past 12 months, should not have, because they are high yielding. High-yielding economies have high interest rates for good reason. Either they have high inflation or there is a high risk of doing business in that country. The Brazilian real, here in India, the Australian dollar, the New Zealand dollar, these are all countries with high interest rates compared with Asia or rest of the world. These have been the currencies with the strong appreciation. Is it sustainable over a period of time? I am not sure. At some time, they will react to the rising trade and fiscal deficits and this will feed into the risk premium associated with these currencies.
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