FIIs have been underweight on EMs for a while: Ashburton

Foreign investors have been underweight on emerging markets for a while, says Jonathan Schiessl, Chief Investment Officer of Ashburton Investments. FIIs have been holding off investments due to uncertainty of US presidential elections. He is not concerned about a Federal Reserve rate hike. He sees value slowly emerge in the tech and pharma sector of the Indian market soon. He adds that any fall in Sun Pharma is a good opportunity to buy into it.He does not think the Tata-Mistry issue is going to impact Tata Motors. But it is going to have a short-term overhang on Tata Group's stocks.Schiessl likes some large-cap auto stocks and says their valuations look attractive. He is also positive on the auto ancillaries companies.Below is the transcript of Jonathan Schiessl’s interview to Sonia Shenoy and Anuj Singhal on CNBC-TV18. Sonia: Before I start talking about your fund, I just wanted to ask you how are you approaching the emerging market space as a foreign institutional investor ahead of the key US elections. A: A lot of foreign investors have been very underweight emerging markets as a whole for the last 3-4 years and certainly, I do believe that there is a move afoot and more broadly based to increase emerging market weights generally speaking. And if you look at performance year to date, you have seen a bit of a move back in December, the more commodity producing emerging markets as opposed to the likes of India which has lagged a little bit. We think that that sort of move is probably quite long and obtuse and probably you will see some attention coming back to the likes of India, but obviously, there is some concern about US election November risk and obviously, that clouds things in the very short-term. Anuj: A lot of your stocks have done well, but today, I want to talk about a couple of stocks which have not done well. Infosys, which has again hit a new 52-week low and sun pharma which has hit a multi-year low and you have significant holdings in both. Are you perturbed by what is happening or you tempted to add more? A: We have been looking at both the names and we are very tempted. We are seeing value re-emerge in a lot of names in both the IT and healthcare sectors. The issue remains one of what I briefly mentioned before of end-risk. Certainly, today some of the pharmaceutical generic counters are taking a pounding on the back of concerns about generic pricing in the US and you could argue that certainly for Clinton the issue of drugs pricing is as core to her as the likes of Mexico is to Donald Trump. So, certainly, there is still a lot of end-risk around some of the generic names, but they certainly factoring more than a worst case scenario and we are beginning to see value again. And the same goes for the IT space. Obviously, companies have to change their business model if Donald Trump wins. So, we see value, we are certainly looking at it, but the trouble is we have not got a great deal of clarity which way this US election is going and so we are still holding off for the time being. But there is no doubt there is some value emerging in both those sectors. Sonia: So, for Sun Pharmaceuticals particularly, the fear is that a lot of these companies that have an exposure to the US markets could be under pressure because of pricing control by the US authorities. Now there is a probe on possible price manipulation as well. Would that not spook you? A: It certainly spooked the market. The reality of how on earth they think they can prove anything is going to be another matter altogether. This is going to be an overhang for the sector for a number of years, but the reality of the situation is going to be extremely difficult for the administration, the government to actually prove price collusion amongst this amount of businesses. It is not just one or two companies we are talking about here, there is quite a number of companies. So, this is going to go on for a long time and therefore, that is the issue. There is value there, some of the concerns are being priced in absolutely, but there will be noise for quite some period. Ultimately, I would expect that for a longer term investor, these are fairly good levels to be thinking about these stocks. Because ultimately, we do think it is going to be extremely difficult than to actually make a water tight case. Anuj: You have significant exposure in Tata Motors as well. What are your thoughts on what is happening with the Tata Group and the boardroom battle? Do you think these stocks are set to derate more or do you think they will remain immune to this development and actually move on from here and this could be a buying opportunity? What is your thought on that? A: Considering that the Tata Group is such, is being held up as the poster boy of corporate governance, India incorporated for many a decade, what has happened is not great, to put it frankly. We still do not understand, there has been a lot of rumour and speculation, but as far as I know there, there some news that has come out, I still do not understand what exactly has happened and what are the reasons behind it. For a group which prided itself on transparency, that is not particularly great. The underlying holdings, it depends very much on for example, if you look at Tata Motors, you have got a professional management in place with strategies baked in are not concerned whatsoever that the rupture at Tata and Sons is going to have any impact on Tata Motors per se, so any fall in the stock price that has been related to this whole issue, to my mind, is absolutely is a buying opportunity. Obviously, if you look at Tata Steel and the issues they have in Europe where the previous chairman was a lot more involved, there will be more of an impact. But if you look at Tata Motors or even Tata Consultancy Services (TCS), these are professionally managed companies. We have very clear strategies that the whole issue with Tata and Sons is not going to impact those companies. Sonia: That’s true, but the other issue or the other worry is what has played out over the last couple of days where the Securities and Exchange Board of India (SEBI) has decided to seek details from Tata Group companies on possible breach of corporate governance issues as well and generally when things like this happened, there is a corporate governance sort of discount that some of these stocks have given. Would that worry you that there could be an underperformance of Tata Group stocks over the next 3-6 months? A: Yes, you made a very valid point, I think whenever these sort of things happen it will provide a bit of an overhang the stock in the short term or the stock related group entities all of them - - that’s true and obviously we will have to see what comes out with regard to the actual report. I would certainly very much hope that the group is given a clean bill of health, but we don’t know just because there is an investigation it doesn’t mean there has been any wrongdoing, but obviously it does provide 3-6 months a bit of a cloud over the stock until we have some greater clarity. Anuj: The other interesting stock that I wanted to discuss with you was Arvind, what did you make of the deal that the multiples taking stake and the fact that we have seen a bit of a rerating of Arvind and do you expect more going forward? A: One of the reasons we have been in the stock for a couple of few years is basically down to the that portion of the business, which was the exciting portion of the business which plays into this aspirational consumption that Arvind certainly was to our mind the price was not reflecting, the brands it has in its portfolio and the growth opportunity. I think obviously when you look at the pricing that deal was done at most analysts had not been pricing anything like that sort of valuation multiple. Again when you look to the commentary around the deal from the management and the growth prospect for that business, there has been to some extent a way appraisal from certainly sell side analysts upping their valuation numbers for that side of business. That was our original thesis which is playing out and in short term you can probably argue a lot of that in the price certainly, but obviously from the medium to longer term the growth prospects that it has and more clarity on valuation for that business - - we are still quite happy with the counter obviously, in the very short term it probably done it stuff. Sonia: You have been bargain of sorts, you always been interested in stories when the sector and the stocks are in trouble. Now that we have a bit of a dip in our market anything in Indian market that you have been interested in lately, any IPOs that you have bought into, any stocks that you have accumulated? A: Yes, interesting enough we have been looking in the auto ancillaries. I think it is a great way to play particularly the two-wheeler space, so we have been involved there and if you look at the overall market there is no doubt that some of the large cap names are beginning to scream value particularly again some of the mid and smaller cap indices which only a few days back were making the all time highs. The large cap space certainly does look quite good value here, but the other side of the equation is you are much more prone to FII flows in that large cap space. Sonia: What IPO did you just mention? You said you participated in some IPO recently, which one was that? A: That was Endurance Technologies. Anuj: A slightly more macro question on what is happening with the fund flows. October was really bad for our market in terms of FII outflows and the margin really was supported by domestic inflows. Do you think this market is at the risk of this outflow actually picking up as we move closer to the Fed rate hike? A: To my mind, I am not too concerned about the Fed rate hikes for India per se. Obviously, there are concerns about what is happening with the dollar. So, in the very short-term, with this event risk of the US, the way things are slinging around so violently, people probably are just battening the hatches down a little bit in the very short term. I do think though that investors are increasingly looking to get back into emerging markets as a group and therefore, India, with everything that has been going on whether it is gradual recovery beginning to play through with interest rates still heading south as opposed to north in many other markets. I still think the story ultimately is an attractive one from a global basis with the underlying growth, etc. So, we are going to get these periods where flows come and go. We know that. That is the reality of the world that we live in, but ultimately, investors are interested in India and I know from my discussions that multiple investors that there are a lot of investors who are looking to certainly up their India weighting going forward.