Remain overweight on India; earnings to pick up: Mowat

Below is the transcript of the interview on CNBC-TV18.

Sonia: What do you think the trajectory in the Indian market could be? We have been flagging off a tad bit but by the end of this year what is your prognosis of India versus other emerging markets?

A: We maintain an overweight view on India with the expectation that you get two key drivers – one is an improvements in the growth numbers, so both the economic growth numbers and eventually the earnings coming through and second, an expectation that interest rates will be cut. Therefore, we get this combination of discount rate and faster growth which should mean that India provide a very descent return for equity investors.

Latha: What is your sense in terms of sectoral mix? Will people weary about the cyclical uptick not coming in, would you migrate to defensives like IT, pharma?

A: I think the key measures that people look out for the next quarter or so are going to be the macroeconomic data and I do fear that the economy takes a bit more time to build pace. This is a characteristic we have seen in many other economies globally.

India did go through a relatively protracted period of low growth and high inflation. The corporate sector that is survived well has been a conservative corporate sector and the consumer who is beneficiary of the decline in inflation and energy prices also experienced a tough time for quite a few years and may prove to be more cautious.

It is important also to think about the stimulus that is coming through in India. It was only in the beginning of this calendar year that the central bank began an easing policy, ready to with couple of more cuts. Let’s hopefully see one this month. If we look at the fiscal stimulus that was announced in the Budget – that will only start to take effect from April this year.

So much of the stimulus is new; you were just having a discussion on the power sector, they are still working on various norms that need to be put in place to allow projects that are on hold to start going again let alone starting new projects in the power sector. So there is a lot to look forward to in India and its going to be an issue of how patient investors want to be when investing in the Indian economy which is not likely to generate very-very rapid appreciation in growth rates perhaps even in the second quarter of this year. It’s probably going to be more back ended.

To answer your question, I can see there is a benefit in having a bias towards the higher quality more defensive companies. It doesn’t necessarily need to be a sector bias but perhaps more conservative ones.

Sonia: Apart from the power sector we also have news flow coming in for the fertiliser sector about how a gas price pooling has got the cabinet nod, so now there will be lower gas prices that fertiliser companies will have to pay which is positive. On the ground there are lots of things that are improving. How do you make the most of this and what are the fresh sectors that you would advice investing into?

A: You are right to highlight that there has been a lot of progress being made in dealing with issues which have not been dealt with for a protracted period of time. We have had the insurance bill pass through the upper house that was very encouraging. We look forward to, in the next session of Parliament, see some progress on goods and services tax (GST) or even the land acquisition act, which will prove to be more controversial.

All these micro technical issues being dealt with are also encouraging and they should result and build in momentum. In terms of investing directly in infrastructure, probably it’s better to go indirectly and go through the building material companies which will get a general benefit rather than more specific engineering and construction companies. If we do get progress on these different factors, they should help concerns with regard to non-performing loans in the banking sector and so the financials continue to look attractive against that backdrop.

Latha: What is your pecking order in terms of Asian ex-Japan as well what the sense you are getting of fund flows is, will there be enough flows towards emerging markets generally and will developed markets continue to attract more attention now that Europe appears to be troughing out?

A: What I am carrying from my international clients is there interest in emerging market is extremely limited. What they have been looking to do this year is to add more money to Japan and Europe essentially following their performance and they have been funding that by taking money out of the United States, positioning in EM is very low already, most clients are underweight.

I would view that as technically quite attractive and if we can continue to deliver good returns in terms of emerging market earnings growth, which we are seeing improving then you will find that there is reluctant increase in positioning to an asset class that investors are underweight in.

If we look at year to date performance emerging Asia is outperforming the US and the global indices and India is part of that outperformance story as is China, as is places like Indonesia and we are also seeing Korean and Taiwanese tech doing well, Taiwanese financials. So I think the fundamentals story is good, the markets are already performing, investors have been reticent. I suspect eventually they will be pulled into good performance.

Sonia: In your emerging market top ten stock list you have ICICI Bank and Grasim Industries from the Indian markets. What kind of returns do you think quality names like this can give this year?

A: We are not clear to talk about specific names but in terms of the Indian market I am looking for around 20 percent return. If you buy the right cyclical, the right financials, you will get that type of return if not more.

And in terms of playing any improvement in fiscal spending particularly on things like road which was announced during the Budget, plus a hope that we get a pickup in general infrastructure, then building materials is the best way to play that. These typically very leveraged particularly in terms of operating leverage – that will also get a benefit from decline in energy prices, which is a key input cost for the building material sector.