Valuation making India a buyer's market: Eastspring

Nicholas Ferres, investment director, Eastspring Investments, says that the valuation difference between the US markets and emerging markets is making the latter look attractive.

"Recent price action and India's underperformance so far in 2013, indicates that the market looks attractive from valuation point of view. India's general trend of growth data or macro momentum looks poor. So, these may provide an opportunity in coming weeks," says Ferres.   Also read: See mixed Q4 earnings; FIIs still favour India: Syntel     Below is the edited transcript of his interview to CNBC-TV18. Q: Do you see the underperformance continuing, emerging markets versus the US market?
A: It is important to note that the valuation difference is now looking attractive. We have been underweight on emerging markets (EMs) for quite some time. The EM index is trading at a 20 percent discount to global equities and a more significant discount against the US. Generally, the US performs relatively better in terms of earnings delivery. The valuation difference is now looking interesting.       Q: Do you expect rest of the year to map a similar trend that emerging markets actually lag the US market performance as was the case in the first quarter?
A: Not for the whole year, but I think the episode that we are seeing at the moment may intensify. The worry is, copper has broken down out of the wedge pattern and looks quite bearish in terms of its view on global growth. The US treasury yields is also falling which gives insight about global growth. Overall, EMs is a very cyclical index or many of them are cyclical markets which gives information about global growth as well. So, I wouldn’t be surprised if these episodes continue in the near term and the events in Europe last week are not helping the situation either. Q: We had a fair amount of economic weakness in India but have been held up by very strong inflows. Last couple of weeks has been a hint of some ETF outflows. Are emerging markets vulnerable to reduction in flows that they have got used to over the last six-nine months?
A: It looks possible, but I am not sure that all emerging markets would be. I think the flows were mixed overall last year. India was certainly a beneficiary, but markets like Brazil were relatively weak in terms of net inflows. So, that may intensify further or one may see more selling pressure in markets like Brazil.
India saw inflows last year. India is vulnerable because those inflows provide funding for India’s current account deficit (CAD), so they are necessary. So, while India is very much a domestic-demand economy, the stock market is dependent on foreign flows and therefore there is global-risk appetite. So, if there is intensification in global risk aversion then India is one of the more vulnerable markets. Q: At Eastspring, have you translated that into action as well, investment action in terms of going underweight or pulling out some of your investments off late from India?
A: We had no position in India for a little while. But, last year we put a position on and unfortunately we catered too early. We made some profits in the middle of the year but we cut the positions a bit early. Recent price action and India’s underperformance so far in 2013, indicates that the market looks attractive from valuation point of view. General trend in growth data or macro momentum in India looks poor. So, these may provide an opportunity in coming weeks.       Q: Generally, is there some disenchantment on how emerging market growth is panning out with Brazil, India, even China is reporting growth which was far lower than what their averages have been for the last few years? Among global investors, do you sense any disenchantment at all?
A: The growth performance in GDP terms has been little bit disappointing for emerging markets but it is much stronger than developed markets.  Earnings growth has been disappointing for emerging markets. So, while GDP growth may have held up, profit growth or delivered earnings growth in many emerging markets has been disappointing and partly that can be attributed to why the markets are being de-rated.
Overall, if one look at the emerging market complex, it is overweight. Basic materials, mining and energy sectors have suffered the most in terms of earnings downgrades. But some emerging markets had issues with labour cost or rising wage cost and input cost and India is also an example of that. South Africa and Brazil markets have also seen simial issues. So I think this is more a issue than growth itself. It is about earnings delivery and that’s important in terms of valuation. Q: What are your big bets right now for next couple of months in terms and in terms of asset allocation?
A: Unfortunately, we were reasonably well positioned in terms of having a modest underweight in equities going into this correction. Unfortunately, we had the underweight in US equities which have held up relatively well. So our overweight positions haven’t worked particularly well as they have been in Russia and Korea. Germany continues to perform relatively strong. We scaled back our positions in European equities in January but Italy is still attractive from valuation stand point. Italy is basically priced for depression and I think the episode that we are seeing in Europe at the moment will present an interesting opportunity for a long term investors. It will be a white knuckle ride.