EMs like India make a great bet for asset allocation: Expert

Market experts believe that despite relatively expensive valuations, India is an important market for asset allocations. Emerging markets are a place to be in and within EMs having allocation towards India is a must, according to Jeff Chowdhry, Senior Portfolio Manager, LGM Investments.Chowdhry, who remains bullish on Indian equity markets, said that India still ranks high among emerging markets even if it is over-owned. In contrast, the US market is both over valued and over bought, he said.

Chowdhry's bullishness stems from the expectation of continued strong inflows into India going forward.LGM Investments is surprised with the way Indian consumer companies have recovered from demonetisation, he said, adding that the house is upbeat about the country's consumer companies and private banking sectors.Investors can focus on companies that have the potential to grow significant cash flows over the medium to long-term, say 5-10 years, he said.

The fears arising out of demonetisation and President Donald Trump's US electoral win have not realised, Chowdhry said.

On the interest rate front, he said that the investors expect an upward trajectory in the US but in markets like India and Brazil the rates are expected to go down.Below is the transcript of Jeff Chowdhry’s interview to CNBC-TV18’s Sonia Shenoy and Anuj Singhal.Sonia: Things have really changed a lot since we last spoke. The US markets are now at record highs, India is virtually at a high, are we expected to see better days yet?A: Obviously people were concerned several months ago about President Trump. They are obviously concerned in India about demonetisation and it is fair to say that perhaps the worst fears for both have not yet been realised.Certainly in the case of President Trump obviously he sort of tweets on a daily basis and he does concern people from time to time. However it is interesting that a lot of his advisors seem to sort of come out afterwards and actually smooth the waters.As you saw in the last few days, we saw one of his senior advisors say that we want to sort of renegotiate North American Free Trade Agreement (NAFTA) with Mexico but it needs to be good for both parties. So, as a result of that Mexican Peso has rallied very strongly.Anuj: What is the way forward, what is your current asset allocation strategy between emerging and developed markets?A: We don’t tend to do asset allocation, we tend to look at companies rather than sort of broad sort of asset allocation. What I would say is, emerging markets as a whole as an asset class look pretty well positioned for a couple of reasons. The first thing is I think the US market by any measure is overvalued and over bought. I think people who have to allocate money around the world have to be cautious of America because of the valuation premium it is to rest of the world.Second thing I would say is that some people are nervous about Europe because we have got elections coming up in France, Netherlands and in number of other markets in Europe and not all of those necessarily are pro Europe parties as far as Europe is concerned. So, people are bit nervous. Last year the big surprises were, Brexit which nobody thought was going to happen and Donald Trump which nobody thought was going to happen. So, people are now saying twice bitten perhaps we would be a little bit cautious this year.Sonia: I heard you say emerging markets are cheap and under owned but does India feature on that list? India is almost at a new high now.A: You should look at it in two separate ways. I think within the context of emerging markets it is a relatively expensive market and it is a relatively over owned market within emerging markets. However you have to remember that because the asset class itself is under owned, when global funds particularly allocate to emerging markets, India is a very important part of that allocation. So, don’t be surprised to see more money coming into India this year from global funds and also passive funds as well as people increase their allocation to emerging markets.    Anuj: What about the rate hike from the Fed? Have investors digested that or will there be any correction because of incremental rate hikes?A: Whether they raise interest rates in March or they raise rates later on the year, I think largely people know that we are in an up cycle for rates but you also got to look at other parts of the world where interest rates are going in the other direction. So, if you look at India for example, we still think that interest rates can come down in India. Interest rates in Brazil have started to come down. So, although interest rates are going up in one part of the world it doesn’t necessarily mean that it is bad for markets, particularly the emerging markets where in some cases they are going in the other direction.Sonia: In India the sectors that have outperformed this year are the non-traditional sectors like telecom, metals and even Reliance after being dormant has now started to perform. Do you like any of these spaces?A: The way we look at our stocks and companies, we take a very long term view and we focus on companies which we think are going to grow their cash flows on a consistent basis over 5-10 years. So, we don’t get fazed if you have a situation where some companies in cyclical sectors have a good return over the last 6 months or a year or whatever. What we are looking for is companies which we think are going to produce very good returns for shareholders over the long term. What that means for us is that we tend to focus much more on consumer companies where we are more confident that they will generate those cash flows over the long term. We also tend to focus our attention on private sector banks where we think again companies can generate good returns. That is why as a result of that we are not fazed by the fact that some cyclical companies may do well or other companies that you have mentioned may do well over the short term period unless we have confidence that those companies can deliver good returns over the next 5-10 years.Anuj: What kind of growth do you see then for Indian market over the next 12-18 months and are we looking at new highs soon?A: I will caveat the answer by saying I never make any forecast for market levels or market returns but I do see that more flows will come into the Indian market. I think a number of companies particularly in the consumer sector are starting to recover now from demonetisation. As a long term India bull, I been a bull of India funds since 1994 which goes to show old I am but I continue to believe that emerging markets are place to be but particularly within emerging markets, India is the place to be. So, don’t be worried about the fact that the market is making new highs this week or next week.Sonia: What about sectors like technology, metals, telecom, some of them are giving us good valuations, anything that interests you there?A: To be frank, no. I think the valuations in some cases are reasonably attractive. However for us the most important thing is can those companies deliver good long returns particularly in terms of generating good cash flows over the medium to long term. If we are confident that those companies can do that then we are obviously very happy to have those type of companies in our portfolio. So, it doesn’t have to be just large cap companies. We own companies like Britannia, Emami in our portfolio, we are not necessarily with traditional large cap companies but because we think those companies can deliver good cash flows over the next 5-10 years we are very happy to own those in our portfolio.