Underweight on IT; like cement, NBFCs: Ashburton

Emerging markets, especially India, have more juice to go, he said. He also warned that he has adopted some protection strategies in light of some unforeseen event.

He says he has faith still left in domestically-focussed counters, cement and non-bank financial companies. In particular, he mentioned ICICI Bank.Below is the transcript of Jonathan Schiessl’s interview to Surabhi Upadhyay on CNBC-TV18.Q: What is your sense? Were you expecting such drastic commentary to come in from industry titans both Infosys and Tata Consultancy Services (TCS)?A: Yes, it is a bit of a surprise. I guess perhaps it should not have been. A lot of the companies with exposure to Europe and US have been using the Brexit excuse just to sound a little bit more cautious in their tone. The big Indian IT players are playing the same game.Q: Is it more than that? That is the concern, whether it is just Brexit and therefore just one Royal Bank of Scotland (RBS) contract cancellation because we are talking about a bigger disruption here. Some analysts in India are talking about cloud and whether these companies have been quick enough to evolve their business models, etc because today what TCS is saying is that there is cautioun on their bread and butter, financial services vertical.A: I totally agree with you. There is no doubt the industry is changing at an incredible speed and some players perhaps have been better than others about adapting to this changing environment. Obviously though, broadly speaking, yes, it is certainly not just Brexit, we still have a lot of uncertainty in the US with the upcoming elections. So, companies are being prudent to be just slightly more cautious because of that uncertainty from Brexit, from US elections. But as you say, the underlying reason is probably a little bit more than just the macro uncertainty and industry dynamics changing as well.Q: What is your current call on both Infosys and TCS? Do you like these stocks?A: We have been long-term holders in Infosys for a long time. We are recently underweight this stock. We have just kept it as it was. We have not owned TCS for some time because of valuation issues. We are very underweight the sector, which is probably the right thing to do. That certainly helped us in the short-term. But, ultimately, for overseas investors into India, the IT sector does provide that natural hedge against rupee risk or rupee depreciation risk. So there is, from an overseas investor perspective, always something in the back of your mind that keeps you looking at the sector even though when fundamentals perhaps might not be so great.Q: It is interesting you say that. Then how does one position in the portfolio, what would you expect, how would foreign investors look at Indian IT given that you are talking about that natural hedge and yet, the business undertone, which is very cautious? Would you at all look at buying IT? Is it anywhere close to the bottom? All these stocks are negative year-to-date.A: Absolutely, we are underweight and I would assume many other foreign investors are underweight as well. It is difficult to get too excited about the sector at the moment with all the uncertainty and changing dynamics within the sector as well. So, I imagine most people will remain underweight for some time.Q: Let me broaden that conversation a little bit. The India markets flirting with its all-time high, Sensex around 29,000, is there more steam in the India rally?A: I guess it comes down to what is moving markets. Is it underlying fundamentals or something else, central bank action, liquidity? I guess India probably, when you look at other emerging market does have a very strong fundamental case behind it with what is going on in the economy or reform momentum, etc. However, there is no doubt that in short-term, if you are just looking at valuations, it is slightly -- the market is getting a little bit ahead of itself in the short-term. However, then again, issue is that plenty of markets globally are in a similar position. Valuations globally are looking a bit excessive. But the big question is obviously, this liquidity which is being driven by global central banks can last a lot longer. So, we are in the market, we have a very large overweight positions to India, we are still happy to do that. But we are getting incrementally more cautious.Q: So, are you saying you are overweight now but would you advise against further purchases? How would you look at India right now? You mentioned liquidity, we are talking on a day when the European Central Bank (ECB) is going to be coming out with their rate decision. So, what is it that you would expect in terms of just added liquidity and how the markets will digest what central banks are doing?A: Obviously, the ECB, there is still a lot of debate about that. We have not got a strong view on that, but from our perspective, we have upped India weights more recently. We think emerging markets and certainly India probably -- when you look at it on a global basis -- has more juice to go in them. But on the other side, we have adopted some protection strategies in the event of a bit of volatility coming back. So, what we are trying to do is get access to the upside but also in the event of some unforeseen even which just forces a bit of volatility to come back to protect that downside risk.Q: What would you buy in India? What would you recommend or what is your top favourite bet right now?A: You talk about the index looking a bit pricey but when you look at some of the individual counters and how much they have moved over the last, since the lows in February, is quite extraordinary. Some stocks have done well in a very short period of time. So where are we incrementally putting new money? We have out a little bit of money to healthcare. We are still underweight there.As discussed earlier, natural choice could be IT, but with the dynamics, as we have just discussed, it is not an area we have put new money to work yet. So, broadly speaking, any new flows that are coming in, we are putting it in across domestically focused counters. Yes, some of them have moved up strongly, but we try and take a slightly longer term view. So, the domestic focused stocks, the infrastructure names, cement has done incredibly well, we will still be allocating money back into the sectors as well, infrastructure, cement. Some of the non-bank financials as well, although they have done well, they are still looking interesting. The other area would be the likes of ICICI Bank, which had obviously lagged some of the public sector banks. So, some of those names look quite good as well.Q: Just a clarification on IT. You mentioned you are underweight on Infosys, are you looking to hold your current positions or are you looking at trimming positions given the new market reality in what these companies are saying?A: We are holding our positions. We are viewing the positions in the pecking order of the names that we have, we have no plans to totally exit this sector at the moment.