IT at attractive valuations, plan to top up holdings: Ashburton

Still one needs to see whether IT companies use their cash piles in these tough times, he added.Below is the transcript of Jonathan Schiessl’s interview to Latha Venkatesh and Anuj Singhal on CNBC-TV18.Anuj: What is your sense? Do you think this panic that we are seeing in India right now is a buying opportunity or do you think this demonetisation has changed things at least in the near-term.A: Clearly, the demonetisation issue probably has further to play out. But on top of that, we have the whole Trump election, which emerging markets generally have been trying to digest. The pain has been felt quite broadly across the emerging market complex.Of course, we do have this added dimension from an Indian context in trying to deal with an unbelievably radical policy, which nobody quite knows how it will play out over the coming weeks.Latha: You have real money on the ground. What would your reaction be? Would you want to pull out some money, watch the situation and then come in?A: We are genuinely trying to be more longer term investors and when you look at what the aims of this whole scheme are, then on the surface it appears a very valid way of trying to deal with the black economy and counterfeit notes, etc. So, from a medium-term to longer-term, does it fit in with the whole Modi reform agenda story which foreign institutional investors (FIIs) particularly have found very attractive, it does.In the short-term of course, nobody knows how that will play out. The market certainly, from a sector basis is being quite brutal in some of its repricing of those concerns. We are telling our investors to be slightly longer-term and yes, it could be 2-3 quarters of growth that might be impacted, but if you look through that, it does not look too bad and perhaps use as a buying opportunity.Anuj: Your India opportunities fund has delivered 65 percent returns over three years. Do you think that will take a hit at least in the next one or two years? Is that the sense you get?A: We have to think where we are in the cycle. Up until this scheme was put in place, we were quite confident that the earnings recovery was beginning to broaden out. The banking issues were being addressed and whilst that will still go on for some time, at least it was in the market. So, we are beginning to feel more confident that certainly from an earnings perspective, from an return on equities (ROE) perspective as well, that we would see recovery. That ultimately, that will pull in more foreign money. Globally, when people are looking at equity industries, they had been pricing in the falling risk free rate and in India you could justify a chunk of the rise on that. Obviously, now bond yields are rising globally. That puts that story somewhat at risk.So, for us, the returns from where the economy is going to go in the next couple of years, India still looks a very attractive story. But of course, the better news now is we have begun, the markets have fallen off so substantially in such a short period of time and I think there is certainly more downside risk in the very short-term that we will be telling our investors that this is a good time to be looking back at this story again because ultimately, we do believe that earnings recovery coming through just might be delayed by a couple of more quarters again.Latha: The Trump victory and the rise in US dollar to 101 and change now, I think it is 101.23 and US bond yields as well going to 2.33. what is the algorithm therefore for the emerging markets?A: Obviously the strong dollar traditionally is quite a headwind for emerging markets (EMs). Our argument would be markets are very quickly priced in this so called Trump action of reflating the US economy. Possibly markets have pushed on a little bit too far would be our view in the short-term. The dollar does looks like it wants to go higher but I guess a good chunk of the reason for the dollar's move is obviously those rising bond yields and obviously where they can get to. It was interesting to see Yellen's comments, which is perhaps saying in a way there is enough fiscal room for Trump to do lot of the things that he wants to do. The economy is obviously at or near full employment. So, yes on the face of it a rising dollar is negative for EMs obviously but we have certainly priced that in the very short term but globalisation and all the factors that drive EMs they are not going to go overnight. So, we are quite naturally inclined to putting more risk on in the EM space generally.Anuj: In your portfolio you have large weight for IT stocks. I see Infosys as your second top holding, HCL Tech as well with about five percent weight. These stocks have now come down to trough valuation and these stocks started to correct even before Trump win because there was some genuine pressure on the business. Incrementally are you buyer here or do you think there are some more headwinds?A: Yes, interestingly we \\topped up on some of our pharma names before the election. We are tossing up between the pharma and the IT sector. For us those headwinds in IT they are so pretty heavy and really the election result has added another layer of uncertainty just until we get some more clarity about what he actually will or might do. I do agree with you that certainly valuations look very attractive. Obviously some market participants are waiting to see if some of these companies start utilising their cash piles and a little bit more aggressively perhaps buy backs or increased dividend or something which could be a spur to the sector. I will tell you we are still working on the sector. We do like the value that it does offer. But obviously there are still certainly topline headwinds and structural headwinds.Latha: At least it is still immune to the near-term cash dislocation in the Indian economy. And if your theory is that Trump will take a while to have any isolationist measures you still don't think there is scope to increase your exposure to these kinds of IT stocks?A: Yes, as I said we are doing a lot of work on the names. When you look at the EM currencies, the rupee and stuff certainly they have weakened off fairly aggressively in a very short period of time and I just sort of worry that perhaps the whole Trump reflation trade and anti-globalisation story has got a little bit ahead of itself. So, we are currently looking at those sectors with a view to ultimately topping them up at some stage.Latha: If you have to expand beyond IT and probably pharmaceuticals, what would your next picks be? Would you now look at consumption stocks with greater verve?A: We have been carrying quite an overweight to some of the consumption based sectors for some time. I guess, if we are looking at the short-term where we are seeing such dislocations just in the very short-term where we think there are still structural stories and longer term value. So, some of the two-wheeler space, we have been recently taking some exposure into some of those areas, but many in the auto ancillary area, two wheelers and four-wheelers as well. So, we have been upping our weightings to those. Great structural stories over the medium to longer term that have certainly come under pressure in the short-term. So, that does look attractive to us.Anuj: The stock that has made most money for you is Eicher Motors. But do you get a sense that some of these auto discretionary will now take a bit of a hit and are you looking at maybe shifting some of your positions from Eicher Motors to more a global play like Tata Motors? Just wanted to understand your thoughts on that.A: We have been in Eicher for many years and it has got to be said, it has been such a good performer for us that the sell side community has been banging on my door many a time to sell that particular stock which would have been a mistake. Clearly, again, I do not want to get back again on the demonetisation scheme, but there will be uncertainty for a lot of sectors, for one or two quarters. So, the way we trade and think about investing is we do not want to be too reactionary to what we would consider short-term. So, we are not going to sell stocks over worries over one quarter’s numbers or two-quarter’s numbers. And if we see longer term and medium term structural trends that are still playing out, we are very much happy to stick with those stories. So, we try not to be too reactionary to what we would consider noise and it is a fairly significant piece of noise, do not get me wrong, but it is just on a very short-term basis.Latha: Capital First is a stock in which you have about 4 percent and these non-banking finance companies (NBFC) have given tremendous returns. That, and of course, the other non-bank company in your list, HDFC. How would you approach these kinds of stocks now after the recent dislocation?A: Actually, it has been interesting because there has been some concerns over the whole what has been going on in real estate pricing, loan against property, all these areas that have perhaps been highlighted by recent government actions.Again, when I look at the structural trends towards mortgage financing and when I look at urbanisation rates in India and where we think they are going to go to, these are areas which structurally over the medium to longer term have huge growth opportunities and certainly the companies themselves give that message as well. We would concur with that. But clearly Capital First had been an incredible performer up until the last month or two. We did take a little bit off the table there, but longer-term we still think that there are huge growth opportunities in these companies and HDFC is no different. Obviously, it is a lot more established, phenomenal brand. The metrics that that company has produced over all sorts of conditions are simply unmatchable.Anuj: Arvind is a stock that has done well for you and we spoke about this stock after the deal that took place between the multiples and the company. Do you think it is time to top up on this investment after seeing the decline of 20-25 percent from the top?A: Yes, if I am honest there is quite a few what we classify as midcap stocks which have been pounded in the short term. We are looking at the portfolio, we are still getting good inflows into our India strategy. So, these are sort of names that we certainly are considering to top up in this current time.Latha: What is the one sector that looks like a sunrise for you and you are looking at it with some interest and what is the sector you would avoid?A: I am going to start with the one that we would avoid first. We still haven't got any direct exposure on the staples sector. We have got nothing in there for the best part of two or three years. It is valuations concerns we have and few other issues with some of the main companies in the sectors. We have had nothing there, we are happy to continue to have nothing there. We still think one of the most attractive areas -- why do people invest in India it is a catch up trade to a large extent. So, anybody should have big overweight on the consumer facing sector and yes, certainly at the moment a lot of the stocks that we own in the space and a lot of the stocks on the market in this area have been pounded recently because of recent government action. Therefore it does provide opportunities for genuine long term players. We don't know when the market will bottom, we don't know when many of these names will ease out. There could be more downside certainly in some of these names in the short term but anybody thinking for in longer term with some of the good companies then we think they are very attractive.