Short-term woes galore, but bullish on India: Ashburton

Sonia: It has been a very interesting week not just for India but for global markets as a whole dealing with this whole Yuan devaluation crisis. Do you get a sense that the worst is over or do you think that because of the devaluation of the Chinese currency there could be some snowball effect into other emerging markets?

A: I would agree with you, I think we are all going to get fed up with the Chinese constantly grabbing the headlines either with Yuan devaluation or the issues we have seen in the domestic stock market over the last couple of months as well. I think the message is quite clear coming out of China. It does leave somewhat of a cloud over the emerging markets as an asset class.

I think in the short term it probably encourages flows for the time being back into developed markets. Why? Because people really don't know the reasoning behind this so called devaluation and we don't know how far it is going to go. There is a lot of speculation out there about the extent that they could let the currency slide. We are only a few days into it. So, it is a bit of wait and see.

Anuj: What is your call on India now because you track both India and China. Our market has been a bit volatile but it has been a relative sort of outperformer. From hereon, do you think the Indian market can give good returns?

A: We still hope so. I think in the short-term as I said previously it is going to have a little bit of a cloud over some investors who are just concerned about EM as an asset class. As an asset class it has been underperforming. So, there will be outflows from EM type vehicles which will have an impact on India.

I think the Chinese move obviously puts lot of pressure on the rupee, so therefore for dollar or sterling or foreign currency investors into India. Obviously, the returns are negative if you start taking the currency depreciation into account. Thus external factors, the internal factors, obviously the inflation data, the WPI data, the trend I guess has got some investors rather hopeful of a surprise cut in interest rates and that to our mind remains a little bit difficult in the very short term. So, probably we are sort of feeling a little more cautious in the very short term - in the next month or two, more for external factors than internal factors. Hopefully a little bit longer we are still confident that the economy is gradually gathering pace and that earnings are basing out.

Sonia: This weekend we are celebrating our 69th year of independence and same time last year the mood from the FIIs or the foreign investment community was very different. It was extremely optimistic towards India and that mood has dampened a bit this time. Have you either reduced allocation to the Indian markets or do you plan to reduce allocation or any changes that you have made to your portfolio?

A: Not at all. We are actually very pleased that some of the euphoric sentiment that was around over Modi's election has pretty much gone. I still think there is some lingering hopes out there. We actually think that things actually are going pretty much according to our original plan.

How we are positioned within the emerging world and India is particular? We haven’t taken any money off the table. We added to India a couple of months back when it was underperforming. We are still very comfortable about it. We are probably still looking to allocate more to India. However, in the very short term we just need to see the events that are going on in China, how far this devaluation goes because the ripple effects across the global economy will be major.

Anuj: From portfolio point of view in India, what are the sectors that you would look to increase your positions in or any sectors where you would like to trim your positions with the kind of moves that we have seen?

A: Investors probably are going back and looking over currency plays. Stocks which have benefited from this weakening rupee. So, the obvious ones over this week could certainly be IT and healthcare and obviously they are slightly more external and more defensive as well in many respects. So, those sectors have done well. We are still very much overweight financials which has been a little bit painful over the last month or two. We are still very much overweight industrials and consumer facing sectors. So, we haven’t really changed our stance but obviously the market is flip flopping all over the place in the short-term.

Sonia: Just to throw some more colour on the overweight on financials part. Do you like the private sector or the public sector banks because within the public sector lot there is some hope that the government will put together measures to solve all of the ills in the public sector banking space. Would you buy those names or do you still stick with the private sector lot?

A: We haven’t touched the public sector banks for a long time. You have seen quite a change in valuations amongst that sector. Some of them are looking quite interesting from valuation perspective. What keeps us more cautious is the issue with their stretched balance sheets. Obviously, government infusion needs to happen. The other thing we are looking for is a clear signal from government, an action from government to see these banks being run in a more commercial manner with external managements and competing more with the private sector banks because otherwise over time, when you look at market share of public sector versus private sector, the private sector is gradually eating up market share of the public sector names. Unless we see more commercial management, I can't see that trend reversing.

Anuj: Apart from currency and what's happening in China, what is the biggest risk to this market specially in India?

A: I still think there is obviously a risk that EM generally and particularly India will have to face to a degree. Therefore, people will remain focused on the FOMC and if and when the Fed will raise rates. The currency is certainly a big risk. If China does devalue significantly, that will put considerable pressure on certain segments of the Indian economy. Of course India isn’t huge exporting powerhouse but obviously from an employment perspective, the textiles industry is very important. So, that would be of a slight worry to us on some of those externally facing areas.

I guess the last risk is, it seems like this parliamentary session was a complete washout. There were some lingering hopes that we would see some progress particularly on GST in this session. Nothing seems to be unfortunately happening on that front. So, if there are any residual bulls out there who were expecting quick bang reforms then perhaps they would be disappointed at this stage.