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Ignore India's politics, cash in on quality cos: Aberdeen

Feb 21 2013, 14:10   |   By CNBC-TV18

Notwithstanding the performance in global markets, Peter Elston, Head of Asia Pacific Strategy & Asset Allocation, Aberdeen Asset Management believes a substantial correction is in the offing. He even chooses emerging nations over developed countries saying "EMs tend to produce better growth than developed countries."

Specifically on India, Elston doesn't expect too much from its messy political scene, but is willing to bet on the country as fundamentals are improving.

Also read: See bond yield at 7.7% by mid-March: Nomura

In an interview to CNBC-TV18, he says "just try to find good quality companies that can grow regardless of what is happening on the macro front".

Below is the verbatim transcript of his interview on CNBC-TV18

Q: There has been a lot of talk about an impending correction after such a strong global market performance but that has not materialized. Do you think this strength will hold up?

A: Yes, correction has not materialized yet. Normally, after such a sustained rise like we have had in the last six-seven-eight months, you do get some sort of correction. So, it is more likely than not that is going to come at some point; the only question is how big it is going to be. That depends on whether you think we are at the beginning of a sustained bull market in global equities or whether we are still stuck in this sort of range that we have been in for the last ten years or so. And that depends on whether you think the global financial crisis is essentially over, we do not think it is.

We think that government debt levels in key developed markets have reached such high levels that going forward it is going to be a drag. Therefore, we think we are more likely to be still stuck in this range in which case, we think we are near the top of a range. We think that there will be a correction and that it will be fairly substantial.

Q: Which markets do you think will be more vulnerable in that context; could it be the outperformers of last year, markets like India or the developed markets where the US market has been a leader?

A: Looking at it from a fundamental perspective; we generally feel that emerging countries tend to produce better growth than developed countries. There is nothing particularly controversial about that. Over the long-term, we normally expect better returns from emerging countries.

Within the developed world, I think we have to look very carefully at the fundamentals, in the extent to which economies have been sort of artificially supported by loose fiscal policy. In those terms, you would have to say that the US looks the most vulnerable because their fiscal policy has been the most loose. You are looking at a fiscal deficit which average around 9-10 percent of gross domestic product (GDP) for the last four years. You are going to get a major fiscal contraction this year. However, I am not sure that is anticipated by market. So, I think it is possible that is where you could see the biggest correction.

Q: Aberdeen Asset Management has been a fairly significant investor into India for well over a decade. How do you read fundamentals in this market, which has run up quite a bit last year, are earnings disappointing you or do you think we are on a road to recovery?

A: Generally, we do not try to read the fundamentals in India. We never expect too much from the fundamentals and we don't expect too much from government policy. India is a place where we don't expect too much from what is a fairly messy political situation. We just try to find good quality companies that can grow regardless of what is happening on the macro front.

In terms of the Indian economic picture, it seems to be showing some sort of tentative signs of improvement whether that is exports that have started to bounce back, whether the rate of increase in wholesale prices is still declining. On the Budget deficit side, there are tentative signs that that is showing an improvement as a result of various measures such as the deregulation of diesel prices.

So, on balance, we think that the fundamental picture in India is probably improving. Lots of challenges remain but on balance things are getting better.

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Q: Is it one of those markets which you would be overweight or do valuations make you skeptical about this market?

A: We are overweight and have been for many years on the basis that India is a country where we had a lot of success in identifying good quality companies, using the criteria that we have for assessing quality. That still remains the case.

As far as valuation is concerned from a relative perspective, Indian valuations are now a lot lower than they used to be. It wasn't that long ago that the Indian valuations were close to double what they were elsewhere in the region, and it is now more like 20-30 percent premium.

If you take into account the fact that the long-term growth potential in India is much better than it is elsewhere in the region; either because GDP per capita in India is much lower than the rest of the region because the demographics in India are much more favourable. Since 20-30 percent premium looks pretty cheap, we continue to like India and we continue to like Indian companies because of that.

Q: In the past, you have not made too many switches in terms of your sectoral or stock allocation, have you had reason to change that around though because of earning season, since there has been quite a bit of criticism on the quality of earnings this time around?

A: We do not tend to change things very much from month-to-month or even year-to-year and that is because we are long-term investors. We are buying companies hopefully to hold them forever. In reality, that is rarely the case but we hope to hold them forever. More often than not, we do end up able to hold them for at least five, probably more like ten years. So, we have not changed things very much, we might have tweaked ratings here and there.

However, as far as this issue of earnings quality is concerned, earnings growth has certainly fallen from what it used to be. We used to be talking about regularly getting 25 percent earnings growth, and you are a long way from getting back to that sort of level. However that is not surprising, I do not think we are ever going back to those sorts of levels on a sustainable basis.

I am not sure that earnings quality has fallen. It is more a matter of getting a natural decline in the growth rates of earnings.


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