Most excited about cyclical recovery in India, have exposure to infra: Ashburton

Talking about India, he said headline India indices look expensive but sectors like cyclical look reasonable.

According to him, bank recapitalisation was one of the requirements for public sector banks. However, not keen for public sector undertaking (PSU) banks but prefer private corporate sector lenders.

We are underweight on the pharma space currently, said Schiessl.

He further mentioned that the consumption side looks good but we are most excited about cyclical recovery in India. Therefore, have exposure to infrastructure.

Below is the verbatim transcript of the interview.

Latha: Just to refresh your memory in case you didn’t look at every one of the numbers, India’s ranking in World Bank’s ease of doing business metrics has gone up from 130 to 100 and this is the most dramatic improvement that we have seen in our history. It comes on the back of more people paying taxes or at least the tax system covering more people as well as because of the insolvency resolution process that has been put in. Does that change your attitude to investing in India?

A: I have been travelling to India since late 80s. From my small areas that I have been interacting with the country, it has always been a country with tremendous potential but there has always been that one of those conundrum is the access to that potential has always been quite difficult. So I think anything – clearly what this Prime Minister has been doing, this has been the big focus area there has been concrete evidence of changes in certain segments and absolutely, it is a sort of half pat on the back moment for India, it is an achievement. So let us not take that away but I think the reality is India is still sits at 100 and there are still other areas for significant improvement. Hopefully, these other areas will be addressed as well and I expect them to be addressed going forward.

Surabhi: Then the basic question that can you perhaps convince some of the fence sitters with this so called certificate now coming in for better business environment in India, can you convince the fence sitters among foreign institutional investors (FIIs) to start investing in India?

A: I am not sure if one piece of news like this will necessarily change the mind. I think it is another positive piece of news which just adds to the incremental positives that India has been showing over the last few years. So from a market perspective, it doesn’t make huge amount of difference quite frankly but certainly if when we are looking at India and we are looking at businesses who want to set up in India, who want to invest in India, which can help the employment situation etc then anything which encourages money coming from outside into India and if it is easiest to come, it is going to be welcomed because ultimately, then it will have an influence on the economy and then ultimately, that could have a difference on the stock markets.

Latha: Stock markets have been notching up to higher highs with almost every passing day, is that worrying you or are you all in?

A: Clearly, I think there is a global issue with the rally. First of all, before we get to the India side, I think globally we are grappling with expensive valuations although equities per se but then of course if you start looking at bonds and everything else then there is a story for equity.

Globally, if we look at valuations in the US and in the Europe, emerging markets generally as a group looks quite attractive. Now, India on a standalone basis, is not a cheap market and that is certainly a concern and then even if you look at certain segments of the market, the more quality segments of the market, are trading at eye-watering valuations. So there are some areas where clearly valuations are quite excessive.

I think the interesting thing for us is following the announcements made a few days back about the bank recapitalisations. If as an investor you can be more confident but ultimately, India is finally addressing one area, which is delayed recovery then maybe a bit more cyclical exposure is required and the cyclical sectors are a bit cheaper.

In the headline, India looks expensive but I think there are some interesting sectors out there.

Surabhi: Are you already starting to invest in these sectors that are not very expensive for instance public sector banks as you mentioned and have you already bought these PSU banks?

A: I think certainly the recapitalisation was one of the requirements for public sector banks. I think from our perspective, there is many more before we would regard them - as a group – as being investable. Certainly there are a lot of other issues that needs to be addressed. So I think for us, we have gone through quite some pain of investing in the private sector corporate banks and they are looking equally as attractive as the PSUs here because obviously the revival in the whole corporate side, a revival in lending would benefit these guys as well. So we are not keen on the public sector banks just yet but we are quite keen on the corporate lenders.

Latha: Any other economy facing stocks that you are interested in?

A: Non-bank financial companies (NBFCs) - again there is a bit of a wobble with some of the non-bank financials who have done quite well over the last few years. A lot of them producing reasonably good results. So we are still happy with the names we have. We don’t know any other retail – the very expensive private retail banks we are having for sometime, that has been a painful position not to own any of those banks and we are stuck with the corporate banks and hope they will now come good. So we have one regional bank as well, City Union Bank but that is it, we don’t have too much.

Surabhi: What would be the pecking order in terms of stocks or sectors, would it first be private corporate lenders, what else on your radar?

A: I think for us, we have written quite a lot of pain in the private corporate banks and they look good going forward to us here. So the consumption side looks good but we are probably most excited about getting cyclical recovery. So we have had a exposure to road build for sometime, infrastructure, broad areas where we see that if this economy does start to gain some traction, some of these more cheaper, beaten down infrastructure plays could be quite interesting.

Latha: You began this chat by saying that not just India but all markets are expensive, do you worry that something will give and if yes, what?

A: It is incredible how much political noise has been thrown at markets but markets still grind higher. Ultimately, absolutely, it will give it some stage but I guess when you look at flow, when you look at global investors positioning in equity, I don’t think we have reached extremes just yet. It is looking expensive so these things can get more expensive yet in the time ahead.