The problem with emerging markets is its massive divergence in performance, says Jonathan Schiessl, Asian equities specialist of Ashburton.
However, Schiessl, who runs an Indian Equity Opportunities Fund and the 'Chindia' fund focusing on China and India out of London, says he is more bullish on the big two Asian giants currently than he was before. "A lot of the developments in India -- from falling commodity prices and few of the other issues -- make us a little bit more constructive on India. But yes from an economic perspective, it is still a pretty mix picture across the region," he told CNBC-TV18 in an exclusive interview.
But Schiessl says fallings commodity prices, though a positive, does not help much as he feels investing in commodity-related stocks is tough in Asia's second-largest economy. He says foreign investors are waiting on the sidelines for more clarity on the political front.
"In the past, we have the energy sector as being a sort of hedge due to energy issues in India. But we find it quite difficult to invest in a lot of the commodity stocks. First of all, because of the pricing transmission is issue and secondly, a lot of these stocks are obviously are Government of India undertakings and they are not necessarily, in our view, being run in minority shareholders’ best interest at times," he explains.
Below is an edited transcript of the interview on CNBC-TV18.
Q: How do you feel about Asian markets right now? Some investors feel a little disappointed about how emerging market performance has panned out and there are some wrinkles about economic performance as well? Would you describe your stance today as bullish or tempered bullish?
A: The issue, to a large extent we face is, even within Asia, the divergence in performance is massive. So, you can look at China, which has been terrible; India, which has been more recently better but after a bad last year and then if you look at the smaller Asian markets, like Indonesia and Thailand, which has obviously been fantastic outperformance. So, I think when we look at big Asia -- and by that I primarily mean India and China -- we are certainly getting more bullish as we stand today. There are a number of reasons for that but I think valuations, particularly in the China space, are very attractive.
Of course, more recently, a lot of the developments in India from falling commodity prices and few of the other issues that make us a little bit more constructive on India. But yes from an economic perspective, it is still a pretty mix picture across the region.
Q: What do you sense from your end investors? Do they buy this optimism that valuations have come down to a lower level? Some of these things, which are happening on the margin, do help macros. Do you find that story accepted by investors?
A: Not the ones we speak to. It is interesting. We have a mix of investors. Some of our African-based investors are certainly more optimistic. When we go down there and we speak to clients, I guess they feel the growth a little bit more.
Our UK-based investors are a little bit more cautious. I think if we are seeing those investors are putting a little bit of money back into equities, they are either going into developed market equities or they are going into developed market stocks that have emerging markets growth opportunities -- so some of the big staples names. But are they buying in emerging markets themselves? We have not seen a great deal of flow from that perspective yet.
Q: Do you see this continuing to be a headwind? The fact that people turn back and tell you: “US is doing so well; Japan started doing well. Why should I take this incremental risk to go to an emerging market like India?”
A: The drivers of what has been happening recently are still in place. If you take it back at level: why have developed markets outperformed emerging markets? There are two factors. There is an economic factor which has been some of the inflation concerns in emerging markets, in India there are structural issues, politics etc and then of course there is the QE that we have got from central banks all over the developed market and Japan now joining that party.
So from that perspective, yes, that has not changed. I guess the data last week in developed markets would indicate things whilst things are getting better in the US but I think we are likely to have QE will last probably longer than many people are imagining. Therefore, the focus will still be on developed markets going forward.
But when I look at the likes of India and stuff, yes, the falling commodity prices and stuff do make us a little bit more optimistic.
Q: How are you tailoring your portfolio in India right now? The fact that commodities have fallen, is it just a macro tailwind for you or have you translated that into your portfolio allocation as well? I see names like Bharat Petroleum Corporation (BPCL) etc cropping up on your list.
A: Absolutely. We are not huge churners. We don’t churn our portfolio around too aggressively. That said, I guess the issue is none of us know if fall in commodity prices is sustainable. So I am not going to change my portfolio and suddenly start buying consumers of commodities like steel companies because iron ore is coming down. Obviously the transmission mechanism in India also is slightly complicated.
Will they like carry on pushing out diesel prices? There is a political element also that you have to take into account. You highlight one stock and that is the only stock we have in the whole energy sector. In the past, we have the energy sector as being a sort of hedge due to energy issues in India.
But we find it quite difficult to invest in a lot of the commodity stocks. First of all, because of the pricing transmission is issue and secondly, a lot of these stocks are obviously are Government of India undertakings and they are not necessarily, in our view, being run in minority shareholders’ best interest at times.
Q: What’s your view on the Indian IT because that went through a rough patch after the Infosys earnings? You seem very bottom-up in that space. You have got names like Tech Mahindra, HCL Tech but not necessarily the big companies there. Can you make a big top-down case for Indian IT?
A: It is difficult. We are very much focused on bottom-up in the IT sector. We haven’t owned Infosys for a long time. Speaking to a number of sell side analysts, they were saying there were very few funds who weren’t owning Infosys at all, so that certainly helps.
Indian IT is in a difficult space at the moment. Sure, they have had the benefit of the falling currency, but I think there are a number of issues, well flagged issues are the issues in the United States with a change in possible regulation which is potentially a huge headwind.
I am not sure the market is fully factoring in the implications. I think people are viewing, probably correctly, that in its current format there will be changes about regulations. Also, Indian IT is very specifically focused on few niche areas. There are relatively small parts of the overall outsourcing chains. It is not a huge market share that they have got.
For us, we are more focused on what’s important to us. What happens to the currency - is that going to drive my stock selection? No. It really shouldn’t be the way because the rupee has been incredibly volatile.
To try and predict with any real certainty where the rupee is going to be in one month’s time or three-five years time is quite difficult. We have to obviously attempt it but the certainty level is pretty low. So, really for us it is more of a bottom-up case. What we liked about the names we hold, we have got valuation support and sort of a turnaround story as well.
A: We have been long time holder in ITC for many years.
Q: It has been a good holding, right?
A: It has been a phenomenal holding. When we first bought it, we used to put a cap on what is the sort of stock which Warren Buffet if he was coming into India would buy. At that time, ITC ticked the box.
It has the stable cash flow with the tobacco business and all the emerging consumer facing businesses, agricultural businesses, etc. I am still quite optimistic on ITC. Yes, it is difficult from a valuation perspective; there is no doubt about it. It makes one swallow his heart out.
We will have periods of underperformance but we are willing to put up with that, because the stable nature of the cash flows, emerging growth businesses look good to us. Ofcourse I think it is right to be in a staple sector at the moment.
Finally, we are seeing some slowdowns across multiple categories in some of the smaller FMCG companies that have been quite stressed recently. Then I guess there is the issue - does one play the rural consumer, the urban consumer, because obviously that has been doing a lot better than the urban consumer. I think it’s a well known space. The long-term catalyst is still there. It is just the valuations, that in the short-term is a bit of an issue. We have a big overweight stance on the sector. We are probably comfortable where we are, but it has not been a great generator of alpha for us. ITC has been good, but some of the other names have been a bit poor.
Q: What else do you own out there? I can see that you have things like Eicher Motors, etc.
A: That has been a phenomenal performer for us. But we own a couple of other names. Whirlpool of India for example - that has been a difficult stock for us more recently. We are waiting for their discretionary spend to come back which hasn’t come really. Then, Tube Investments, which is obviously the bicycle side has got multiple other levers to that company. Those two have not been great performers recently, but we are very comfortable with the long-term picture.
Q: How bullish are you on financials in India?
A: We have been having a big debate in the team about the cyclical outlook of India. So, the Reserve Bank of India (RBI) cutting last week, what do we do with our portfolio - we have quite a low beta portfolio. We felt most comfortable in the financial space, its where we have been – if we have slightly moved around the fringes, we have put a little bit more money back to work in the financial space.
The big question is, do you go into the non-bank financials or the banks? Then in the banks, is it private sector or public sector undertaking (PSU)? We only got one PSU bank, we only got one private sector bank and we have got a number of non-bank financials. We haven’t really come to the conclusion yet. We are probably going to angle may be to increase our banking exposure. Then the debate for us is do you go PSU at cheap valuations, but obviously there are stress issues there.
Q: Which way are you leaning right now?
A: If you look at HDFC Bank – what a valuation. I just can’t stomach that. It is a phenomenal performer. So, we are not really looking at that one at the moment. We have Axis Bank. We haven’t really finished that debate internally because it comes back to the macro picture.
There is a lot of divergence of views about the RBI – it gave a fairly hawkish statement and therefore is this just a short rally and will it rollback over and are we jumping the gun a little bit? So, we are still having the debate within the team at the moment.
Q: What about the non-banks, why are you more convinced about those names relative to the banks?
A: The ones that we play are asset backed primarily. So, we have the housing finance companies.
Q: What about something like Life Insurance Corporation (LIC)?
A: No. We have got HDFC. The results have been phenomenal. Some people have a long hard look at the valuation there as well and think it looks incredibly overpriced. However, for us it just hits the metrics on a fantastically regular basis. We have also got a couple of small plays in that sector as well – Gruh Finance and we have recently got into Shriram Transport Finance.
All these companies are asset backed. What we haven’t got in our portfolio is consumer finance – that is not backed by assets. So, that is the debate for us. If we are going to go to another non-bank financial, do we go to the consumer side which is slightly more geared shall we say?
Q: What about pharmaceuticals, where do you stand there? Sun Pharma has been a core holding for you but have you been adventurous enough outside like Glenmark and Lupin?
A: Not really, we have stuck to Sun Pharma. We have been in that stock for a number of years and it is another phenomenal performer. It is obviously quite a small part of the index; I know people were playing pharmaceuticals for weak rupee play a while back. Again we rather focus on the bottom-up story within the individual companies and Sun still ticks the boxes for us.
So, we have not dwelled out too much into other stocks for quite some time, we have been fairly stable in our pharmaceutical area and really just held on to Sun. We have also got Apollo Hospitals which has been a long term holding of ours as well. We are still very happy with that story although obviously it is a different story than Sun.
Q: Good stocks are not cheap in India right now, whether its banks are pharma, the difficult call is to buy something which offers value but where there is not too much visibility in infrastructure etc. Of those names which ones are you debating in your head?
A: We have a very set process. We take a number of large assumptions about India. First assumption which many might question at the moment is that growth is a given and certainly compared to an economy like the UK even at trough rates of 4.5-5 percent Indian growth seems so huge.
If you are assuming growth is a given – we are at a trough now, what we are not really looking for, what we really want to focus on – growth is out there, good managements, bad managements can get growth if you have got the right strategy, the right management bandwidth etc.
So, we decided to just focus on the companies where they have very strong management franchise or very strong product franchise. We don’t mind to a large extent paying a reasonably high valuation for a stock if it offers that long term compounding and if they can deliver the growth. I think that is a reason why companies are expensive.
You can choose your time in the cycle about when to buy and when not to, but generally we are not afraid to pay up for something which if over the medium to long term will deliver the expectations that they clearly state.
What we don’t want to do, what we find is very difficult is to buy these stories where you might have very cheap valuations, you really got to be careful of where you are in the cycle, what management is doing, are they doing what they are saying, or are they just talking the talk. So, for us we don’t generally sort of play too much these sort of restructuring plays if you like and these cheaper extremely cyclical plays.