India offers good value over 3-yrs; prefer largecaps: Ashburton

The EM Index driven by China is likely to see more downside, says Jonathan Schiessl of Ashburton. Yet, he is not panicking about the developments in the country.

Back home, he does not think India is trading at attractive valuations yet. However, two things are definitely in favour of the nation — lower commodity prices and earnings recovery, which he believes will materialise soon. He says the Indian market offers good value with a three-year horizon and largecaps are offering better value than midcaps.

Schiessl says he will continue to hold onto Tata Motors for the long-term and is positive on Sun Pharma.

Below is the verbatim transcript of the interview..Anuj: It has not been a good start to the year for equity markets. Do you think it is time to panic about equity markets or is it a good time to get your shopping basket ready?A: It certainly been a difficult start to the year, as you mentioned. The world seems to be worrying about China but it is not quite so panicked about the development, but I think clearly a lot of uncertainty. I guess, to our minds, people are still worrying about what is happening with the US economy, but perhaps, blaming it on China at the moment.Sonia: Emerging market equities have seen outflows for the last 9-10 weeks because of a variety of reasons, whatever you would want to call it. Do you expect the outflows to continue, especially from markets like India?A: I think at some stage the valuation of emerging markets is going to prove too irresistible. I know India is not looking particularly cheap yet, but certainly, some other emerging markets out there are. And if you look at a market like India where you have got a beneficiary of the falling commodity and energy prices, this ongoing albeit slow reform process and you combine that with the possibility of earnings finally starting to pick up, valuations whilst not cheap are looking quite attractive. Elsewhere in the world, valuations are getting cheaper particularly in the emerging market space, but I guess, technically, a lot of people, when you look at the charts and stuff, we could see a little bit more downside to the emerging markets index and I guess that is driven to a large extent by China. Anuj: For Indian market in particular the problem has been that our large stocks are in a bear market. We have seen the Nifty and Sensex not do too much, we have seen so many index stocks in India hit 52-week lows, while the broader market has still done reasonably okay. Do you think that kind of trend will continue in India?A: It is difficult because I think clearly exchange traded fund (ETF) related emerging market selling has been hitting the big counters and obviously, the midcaps and some of the more non-index type names seem to be holding up a lot better. So, to our mind, as long as the emerging market space remain stressed, and it probably will be for a little time longer, then that trend will continue. The only issue for us is that some of the valuation disparity between some of the large counters and some of the midcaps is at extreme levels. So, we certainly find some of the larger cap names beginning to look extremely attractive here.Sonia: That is interesting that you make that point, because I was going through some of the top holdings in your Ashburton India Equity Fund, that you manage and you have stocks like Tata Motors, names like Sun Pharmaceuticals, etc. that have been great performers in the past, but in the last one year, these stocks have come under quite a bit of cloud. Would you keep the faith and still hold on to these names or now, do you think the time has come to churn?A: We are certainly still keeping faith. The likes of Tata Motors has clearly got smacked over worries over China sales. The reality is the new model roll-out seems to be going really well and markets in Europe and UK and even the US are exceeding expectations. So, for us, we are quite comfortable with these stocks taking a slightly longer term view. But clearly, the China story is going to remain a bit of cloud on that one for some time longer. And then the likes of Sun and a lot of the other pharmaceutical names which were markets leaders over so many periods have come under a bit of pressure and obviously, the Food and Drug Administration (FDA) issue seems to be rumbling on for some time longer. But we are still keeping the faith in that name and obviously, it has come off a little bit and we still believe in the synergy that will come out of its takeover.Anuj: What about the large cap IT names, the likes of Infosys, HCL Tech where you have quite a bit of exposure?A: We are not expecting a great quarter. Obviously, the floods in Chennai and the market has certainly pare down the numbers, but Infosys probably looks interesting here again. We almost got our max position in that one. We potentially could add to it, but I think we would like see what the numbers are. I think the street is a little bit concerned about particularly the impact of Chennai on some of the counters.Sonia: Do you still manage the Chindia Equity Fund as well?A: I am still on the committee that manages that fund, yes.Sonia: In your top-10 holdings you have names like Tube Investments of India Limited, Whirlpool of India and Eicher Motors, great quality midcap or rather non-index large cap companies. Would you still hold on to them, because we have seen a considerable amount of peaking off or a sort of coming off of these stocks from their highs that they saw last year.A: These are long-term holdings we have held for many years in those names that you mentioned. We are still fairly confident about the outlook of all of those individual counters. We tend to try and hold our names over the long-term and as long as we can still see the underlying story which is the reason why we own the stock is still there, we tend not to get too worried by the short-term valuation arguments that some of them surround these counters. But, as long as we can see a structural story for owning this stock, we will still own it. And as I have said, we like all those names.