The problems in the BRIC nations are only in the short-term and they present fantastic opportunities to invest in thanks to the favourable balance between value and profitability, says Nick Timberlake, global head-emerging markets at HSBC AMC.
In an interview to CNBC-TV18's London Eye, Nick Timberlake says that among the BRIC nations, he is keen on India due to the strong combination of profitability and value offered by the large number of companies present in the country. The investment has a 27-percent exposure in India which is the largest the investment bank has in any market.
The constant quest for an optimum balance between value and profitability has led HSBC to shun export-oriented sectors like IT and focus on financial services, materials and infrastructure which are troubled by regulatory ambiguity and political inaction.
Below is an edited transcript of the interview on CNBC-TV18
Q: You run a fairly significantly-sized BRIC (Brazil, Russia, India, China) fund. Has there been any disenchantment of late because how these markets have performed?
A: The BRIC countries, in the short-term, have had a tough time. But I would argue somewhat differently. I think there is a fantastic opportunity for those markets today. They are of fantastic value relative to a broader list of global emerging markets and in many cases, the companies that we invest in are generating much higher returns that you might find broadly across the emerging markets.
Q: Have inflows slowed or have there been redemption pressures as well?
A: We had redemptions in our BRIC fund for most of this year- not enormous, but a steady trickle. Though a bit of investor interest, in terms of flows, is starting to the BRIC fund, it is still very early days.
Q: Do you agree with the view that markets like Indonesia, Philippines and Turkey will continue to do much better than the bigger BRIC economies?
A: We invest across a very broad range of countries in our mainstream emerging-market funds. We have potential to expose ourselves to about 25 countries and there are another 40 countries that we are interested called Frontier Markets that we can also invest in from mainstream funds where liquidity allows and from time to time, exhibit more attractive valuations.
Our objective is to constantly search for the markets that offer the best value through the lens of profitability. There are some markets, like Turkey, which have risen quite strongly on high core investor attention.
But then you will find that majority of the markets at any point in time tend to be the ones that we like- fallen out favour on other factors and the value started to appear. That is a good time to be buying again and India is an example of that where in recent times that market started to perform a little bit better.
Q: What role do commodities play in determining your choice of emerging markets this year?
A: Our objective is to find the market with the best value relative to profitability. Our preference for commodities depends on the combination of valuation and profitability. Now India has benefitted by some degree from the fall in prices of some commodities.
We tend not to think about commodities in terms of avoiding or increasing exposure. We are not taking a sort of active bet or view on the fall or rise of oil prices or the prices of other commodities like aluminium. We look at each individual security and the valuation and then come to a conclusion. At the moment we have quite a lot of exposure to energy companies around the world — in India, China, Russia and other countries. In the direct hard commodity space, our exposure is much more stock-specific and we do not have a strong overall view on the whole sector.
Q: In your BRIC funds, are you overweight India or is it just in line with the benchmark?
A: The benchmark is quite lowly weighted towards India. So we reset the benchmarks so that each country starts with at least an equal weighting and then worked out what we like, more or less, on that basis.
As it stands today, we are marginally overweight that equally weighted 25 percent but much more overweight any benchmark that investors might follow. We have about 27-percent exposure to India today, which is about as much as we have ever had.
Among our global emerging markets portfolio India is one of the largest exposures that we have today. One of the advantages that India has is that there are a lot of companies present in the country.
There are more than 70 companies in the MSCI index although it maybe not one of the largest countries, in that environment you are always going to find companies which exhibit an attractive combination of valuation and profitability. We find quite a lot of those today in India. So it is a market, I would say, that we like today and have liked for the last 8-to-9 months.
Q: Has that overweight has come at the expense other BRIC markets?
A: Brazil is the one we liked the least because that is the one where we find most difficult to find value. In fact, the Indian, Chinese and Russian markets are the one we like the most.
As a whole, the Indian market does not look as attractive from a valuation point of view When you drill down to the individual pieces, the market is quite polarised.
Q: Many fund managers point out that the companies that they want to own in India belong to categories that are not very inexpensive - consumers, private banks. Are you hunting down the value chain for better values?
A: Yes. Most of those who are investing in India prefer to go to high-growth areas, which maybe a bit safer and immune to politico-regulatory risks.
We are happy to invest in a sector even if there is a bit of controversy. We have been able to understand the nature of each controversy or estimate the sensitivity and the strength of the company’s profitability. We obviously think about the worst-case scenarios before we invest.
Yes, we have exposure to financial-services sector, the materials sector and the energy segment. All these sectors face a number of regulatory issues, but in the last few months there has been some improvement in the situation.
Q: What is your opinion of Indian IT companies?
A: We don't have much exposure to Indian IT companies because there is so much more value elsewhere such as the sectors that I mentioned earlier.
Q: Another sector where valuations are tempting but the outlook is not quite clear is infrastructure. Have you invested in the sector?
A: We have invested in a few companies with exposure to growth in infrastructure, So, we are carefully watching the whole infrastructure story. The problem with many of these infrastructure companies is the limited generation of profits compared to the rapid increase in their topline growth.
The government has a lot to do. We are not quite sure when the government will get its act together but certainly on a 12-month view, the elections will shift the UPA’s focus from the economy to strategies that will ensure it is reelected.