May 14, 2012 02:19 PM IST | Source: CNBC-TV18

Govt meddling in economy holds India back: Jason Pidcock

Although investors are still cautious on global equities, Jason Pidcock of Bank of New York Mellon believes that they are relatively comfortable about Asia.

Although investors are still cautious on global equities, Jason Pidcock of Bank of New York Mellon believes that they are relatively comfortable about Asia.

"Most investors are relatively comfortable about Asia. Growth remains high in Asia than in other parts of the world," he says in an interview to CNBC-TV18.

On India, while he isn't too bullish at this point in time, he says there are other countries in the region which are much more attractive. India is losing out to some of its Asian peers and his top bets in this region are the Philippines, Singapore, Malaysia, Thailand and Indonesia.

Since he isn't a big fan of India from a top-down perspective, bottom-up he is betting on the healthcare sector. "I would say it is lower risk with a multi-decade story," says Pidcock.

In his view, the concerns in Europe, the extent of the slowdown in China, and what happens to the oil price are three big considerations which will keep global markets under check.

Below is the edited transcript of Pidcock's interview with CNBC-TV18. Also watch the accompanying videos.

Q: What would you say is the position of your key investors towards the issue right now? Would you say they are still in a cautious frame of mind or are they beginning to exude any confidence?

A: I think investors are still quite cautious in a general global sense but most investors are relatively comfortable about Asia and they do see the growth there remains higher than other parts of the world. Even when I look at the emerging market space, they are relatively comfortable of Asia and even if there is a little bit more cautiousness in China at the moment, people can see South East Asia and other markets looking healthier.

Q: Are you seeing that translated into a lot of money flows into your funds? Is that typically coming through the ETF kind of vehicle?

A: We are getting money in but most of it is coming through the income fund that we manage. Lot of people particularly in this country are struggling to find income providing assets classes whether it’s your government debt or bank deposits. The yields are very low. So, if they can find high yields in an equity portfolio and if they want to diversify their geographic or currency exposure then an Asian Income fund can look quite appealing. We have one with a yield of about 4.9%.

Q: What are your thoughts on Asian currencies this year because the rupee has had a bad start of the year? Do you see that kind of depreciating trend continuing?

A: The rupee has struggled for understandable reasons; the political situation in India isn’t healthy from a capital flow point of view. The high oil price, higher than comfortable inflation hasn’t helped the budget deficit and we have seen some weakness in other currencies. The dollar has been relatively strong year-to-date compared to other years and in a rising dollar environment or even when it just stops falling that could be difficult for countries like India which are quite reliant on capital flows.

We have seen reasonable firmness in the Australian dollar and so it has extended across the whole region and countries like Singapore where they have more control over their currency will use that to come down on inflation which at the moment is about 5% and in their eyes too high. It is a bit of a mixed bag. Of course the Hong Kong dollar we expect remains absolutely flat against the US dollar while the Chinese currency we think will be pretty flat against the US dollar this year as well.

Q: Do you share the markets concern about India's macro at this point, the huge current account deficit, etc?

A: Yes it is daunting; there is no easy way out of it. Obviously if commodity prices slump or at least trend down, that will be to India's advantage but I guess you could argue that India has been crowded out to an extent by China and its struggling to get on top of things and therefore there is a lot that's outside of India's control.

It doesn't have the same global supply chain in place that China has, it’s perennially running this budget deficit and when overseas investors are a little less comfortable about the reform agenda in a country, that doesn't help either. In the last year we have had a couple of disappointments particularly on the retail laws, allowing and then deciding that external retail companies wouldn’t be able to invest in India in the way that the market was hoping.

Q: Is that your positioning in India as well, slightly underweight and not quite too bullish at the point?

A: Yes, it doesn’t look desperately cheap. We know what we could like to see that would help but at the moment the better looking stocks, which generally are the domestic consumption stocks don’t look overly attractive. There are other countries in Asia that look a little bit more exciting at the moment.

The Philippines for example. Politically Philippines have improved massively over the last couple of years. They are really trying to clamp down on corruption. There is real buzz in that country and we are seeing a lot more growth opportunities and India has to compete in the minds of global and regional investors with other emerging countries. 

Q: Are you saying in a relative world India is sort of losing out to some of its Asia peers at this point?

A: Yes, you could say that in the last 64 years, India has suffered from the most corrosive of British exports. One Britain has done a lot of damage to India in the last 64 years and it is going to take a long time for that to unwind. There is too much government interference in the Indian economy and it is holding the whole country back.


Q: So what are your top bets in Asia right now because even China has not performed too well as a market over the last few months?

A: You are right. There have been worries about the profitability because of the low growth rate there. We are not overly bullish but we still feel that there are opportunities for total returns. We particularly like dividend income stories at the moment. Companies where the yields are higher than bank deposits or government debt levels and where there is still an element of growth.
So if you find a company with an earnings story of maybe 5% a year and a dividend yield of 5% that is very appealing. That is one case where you can still buy and hold. Many markets are now regarded as buy and hold situations but in the dividend space that is the case.

There are a number of telecom companies across the region that look safe enough. We quite like toll roads in many countries, REITS real estate investment trusts, property trusts. We are overweight South East Asia as a block, if we take Singapore, Malaysia, Thailand and Philippines and Indonesia together.

We are quite comfortable with Australia. We think the currency will hold up better than what many other people think. Australia struggled in the last year partly because of politics as well but with a medium and longer-term outlook for that country is still quite good. New Zealand has come back on the radar as well. New Zealand offers a lot that Australia offers but maybe with slightly less than a hard commodity cyclical input.

Q: How do you see the rest of the year panning out? Do you think it’s a muddle through kind of year or do you expect serious outperformance by the end of it from Asia?

A: It is very difficult to forecast what indices will do. We are stock pickers so we are just try to find companies that will outperform a three-year period. Much of it relates to Europe. Again, it sounds like a broken record but Europe still is very important. I guess Europe, the extent of the slowdown in China, and what happens to the oil price - these are the three big considerations but my view is I think we can end higher than where we are and there are lot of individual stocks which definitely will do that.

Q: What is your base case for the three risks that you highlighted for the rest of the year?
A: We turned quite cautious on China in October last year. We thought that growth this year inevitably would be lower. The government has signalled and recognised that. We thought that they wouldn’t step in with stimulus measures to try and prop it up as aggressively as some people had hoped because there are still overhanging concerns around inflation. The first quarter GDP number was lower. We don’t think it’s going to have a dramatic pick up, so maybe 8% is in  order for the  year unless things go drastically wrong because of some other events occurring.
Profitability is going to show a bigger impact than the slowdown in growth. We are pretty cautious on China, we are not expecting the whole place to unravel, so we don’t think it’s a key global risk. We think Europe is a key global risk and there is a risk that parts of Europe will do really unravel and because of the constraints they have with the currency, it’s not clear to anybody how it is going to pan out. I am not an expert on Europe, but I watch the news everyday and it is a mess and is going to be a mess for some time to come.
On the oil price, it’s difficult to say. Clearly, Iran is a concern but if we see a spike, it probably is a sharp move up followed by a sharp move down. I wouldn’t see it be an issue for longer than a period of weeks or months and at the moment thinks don’t look as ominous as they did a few weeks ago.

Q: So Europe of the three still remains a central risk?

A:  Yes, it is definitely the biggest economic risk in the world for now and I suspect in a few months time it will be.

Q: Is that’s still holding back a lot of investors from putting money into even markets like Asia, the specter of what might happen in Europe and suddenly you get hit by something that you could not seeing coming?

A: It’s holding back people putting money from a sort of risk-on view and that’s probably holding money back from markets like India, but other places are probably benefitting. Australia has benefitted. The currency there has been strong, equity inflows have been strong because the currency is essentially a hard currency, an asset backed currency is where they don’t have national debt to monetise and they are not going to start printing money.

The more emerging countries in Asia unless they have had a particularly good story like the Philippines have probably suffered because of a general worry about equities but other countries probably have benefited at Europe’s expense. One of our key global things as a house is global realignment and it’s very clear what is happening in the world right now and Europe’s share of  world wealth is declining and Asia’s is going up.


Q: You don’t like India from a top-down perspective, but bottom-up what are your big bets there and what kind of themes are you playing?
A: We very much like the healthcare sector. Another key thing for us is healthy demand that we have lot more demand for private healthcare in India going forward. A 75% of healthcare expenditure in India is private sector. That marks it out as being quite different from somewhere like China and it is a sector you can invest in companies such as an Apollo Hospitals or Fortis Healthcare.

There will be more domestic demand for healthcare as people live longer, as they have more disposable income and probably as they live longer with diseases, lifestyle diseases in particular, but India is one of the countries that benefits from healthcare tourism as well. Along with Singapore and Thailand it is becoming a regional centre of healthcare tourism.
Q: Are you comfortable with the managements of Apollo and Fortis companies?
A: Yes.
Q: Do you think they are comparable with the kind of profiles you can get in the region or even better?
A: As companies they are still relatively young and at the stage where they are growing quite quickly relative to some of their peers. There are one or two more established companies that are at a mature level where it’s clear to see where they are going short-term. Both Apollo and Fortis are in quite an expansion phase, particularly Fortis is via acquisitions.

I think the rewards available to them are bigger and therefore some of the risks that they take will be higher. We have to take that into account. There may be some events that we are not entirely comfortable with, but overall we are happy with that package.
Q: You don't see any major stress in their balance sheets as they try and expand?
A: They may have periods where they need to raise more equity and we have already seen that but we actually feel that is a relatively safe sector, where they should be able to get access to credit. They both have assets which they could monetise if necessary. Apollo for example has the largest pharmacy chain in India. If the laws changed to allow foreign retailers to come and to take a larger stake, we think that would be very appealing to many international pharmacy companies.

You could see some kind of JV structure which could then expand even more quickly, get international inputs in terms of how to manage it and then Apollo receiving cash as a result. If there was one sector that we probably feel, comfortable funding it is this sector. You are right, the balance sheets could get to a position where they are stretched for a while, but then I think new funding would follow. 
Q: You wouldn’t extend your bullishness on healthcare to Indian pharmaceutical companies or the manufacturers?

A: We see pharmaceuticals as more risky. The pharmaceutical sector in India as a group rely a lot more on exports to other parts of the world, there is a lot of generic manufacturing and these companies occasionally leap frog each other, you don’t know necessarily which one to back and that’s subject to demand outside of India. Whereas the hospital operators, there are bigger barriers to entry.

You are essentially playing Indian demand and even with the healthcare tourism element, you can see why it’s going to grow because of the low costs in India compared to elsewhere and there are fewer players. Even the market cap in that sector is lower than the pharmacy. So, I would say it is lower risk with a multi-decade story.Q: Since you like the assets owners in the healthcare space, would you translate that optimism to the other kinds of asset owners in India like the GVK and GMRs who own airports and power companies etc.?

A: Possibly, but not right now. They of course are subject to multiple variables and they have development risk. GMR doesn’t just have airports and even there – it’s not just in India, but Maldives elsewhere, not that that’s a negative, but there is more to think about. The inflation, interest rates, it is a more cyclical business. Therefore, we don’t feel that it’s quite as appealing especially in this environment as a less cyclical, but definitely it is a growth story like healthcare.

Q: What about infrastructure? Do you own anything in Indian infrastructure at all?

A: It is an area where we are underweight. We are still comfortable with Larsen & Turbo. We think they are very well managed. They have got a nice portfolio of assets, of skill set and we are very comfortable with them for the longer term. It is cyclical, there are ups and downs.

In the last couple of years share price has struggled as new orders have been hard to come by. But, we think the infrastructure story in India remains, a lot needs to be spend. There are too many bottlenecks. When the government is able to spend more on infrastructure Larsen & Turbo will be a prime beneficiary of that.

Q: What about the Indian consumer companies? You said earlier in the interview that you think some of them are quite pricy? What about the HULs, the ITCs of the world? Do you like any of them?

A: We do like ITC. We think there is a good growth story there. We like the management. We think it doesn’t look too expensive relative to the growth rate. We like Dabur and sometimes it is worth paying up for a good story. So even when they don’t look cheap.

If you find stocks where the PEs are low to mid-20s, it doesn’t sound cheap. But we found in other markets, across Asia, that they earn their way into those valuations. If they are well managed, ideally they will beat consensus estimates and then suddenly the valuation doesn’t look expensive after a year or two.

Q: Staying with the consumption, do you like any of the Indian auto players? Any of the domestic players like M&M or even some of the globally exposed ones like Tata Motors?

A: Tata Motors is doing very well. They have made a various astute acquisition. They have done a good job with Jaguar Land Rover undoubtedly and good luck to them. Hope they grow well globally and they have probably got a good story in China. Personally, I tend to stay clear of the auto sector. It is a bit of a specialist skill set to identify, which will do well.

Over the very long-term there haven’t been many car manufacturers even globally that have been great investments and even the best tend to have periods where they do well. But over a number of decades you would have been better of putting your money somewhere else. It is a bit like football clubs, there is a lot of ego involved in car manufacturing. I guess it’s an area that I would be happy to leave to other people.

Q: You would stay out of aviation for the same reasons?

A: Yes, you should never say never but I never invest in airlines, it’s a very difficult industry. Even when an airline is very well-managed because it will have so many competitors that are badly managed and where is government involvement, it’s difficult to stay profitable for very long.

Because so many governments around the world feel that it is necessary for them to have their own national airline, there simply are too many airlines in the world. Therefore, it is a very difficult sector.

Q: Do you own anything run by the state in India; any state owned enterprise, given that you are a little shaky about Indian politics?

A: No, this is the simple answer. Obviously, the government retains a small stake in L&T, but no management interference in the direct sense, so that’s about as far as it goes.

Q: No state-owned banks either?

A: No.

Q: Do you own any of the banks in India?

A: No, we have HDFC, the mortgage company. We think they are very well-managed and there is a nice long-term story. But, we are quite underweight on banks, normal banks across the whole region, we don’t have many. So, there are many countries where we don’t own any banks. We don’t have any in China for example at the moment.

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