Building portfolios and solutions for the Indian opportunity
Motilal Oswal Asset Management
Oct 27, 2015
Some of India's top asset managers came together at a recent Hubbis roundtable in Mumbai to discuss how the industry needs to approach education for investors and distributors - and ensure portfolios can be built to tap the market potential over the long run.
Roundtable participants
Arun Sundaresan
Deputy Head - Product Management Group
Reliance Capital Asset Management
Aashish Somaiyaa
Chief Executive Officer
Motilal Oswal Asset Management
Vaibhav Sanghavi
Managing Director
Ambit Capital
Amit Basu
Head of Products
IDFC Asset Management
How would you explain the investment opportunity India represents to an investor thinking about the next 5, 10, 15 or 20 years? What would you advise them to invest in and why?
Amit: Before you talk about the investment opportunity and start a conversation with a client, I think the most important thing is to explain to the client why they are investing, the appropriate behaviour and approach to investing, and mutually deciding on the key investment goals.
What makes sense and what is sensational are two different things. What makes sense in a portfolio is asset allocation and the duration that the client holds a product for, while keeping emotions at bay.
Those are things that are sensible for investing, but the media covers things that are sensational yet have very little impact on the portfolio returns and people tend to get carried away with them.
If you look at the equity and debt markets in India today, there are some things that are clearly working in your favour. The current account deficit and the fiscal deficit are slowly coming under control, the inflation is coming down to moderate levels and the government is making the right kind of noise in terms of fiscal consolidation. Overall, you are in a situation where the economy seems to be slowly recovering from the lows. Once growth returns, it will be easy for corporates to start earning and producing better ROE, which is where the opportunity lies in the equity markets.
Having said that, the markets have run up in the last two years, on the basis of expectations of earnings growth. This has to come true for the markets to sustain. We see some pockets of opportunity in some spaces across equity markets, where key things like earnings growth and pricing power has returned and where the industry is consolidating.
People today are expecting a V-shaped recovery but they may be disappointed for a few reasons. Primarily, the balance sheets in corporate India are massively leveraged and that is going to take time to return to normal. The leverage, in turn, puts the ROE under pressure, which in turn affects the ability of the business to invest more capital since the risk-free rate in the market is as high as 8%.
Under such circumstances, you have to be a patient, long-term investor who is prepared to weather the short-term fluctuations and keep emotions out of it.
This is also true of debt markets. We think that long-term debt is the best way to play the markets. There are two legitimate ways to play debt: one is duration and the other is to play credit.
We believe that the nominal GDP of the country is a reflection of the capacity of an economic agent to service a debt. If the nominal GDP is growing, it means that the economic agents or producers of goods & services have got ample capacity to service debt. This was the case in 2009 where everybody was working to make sure that the nominal GDPs go up because there were liquidity concerns and huge stimulus packages were being doled out around the world. Over the last years, however, the nominal GDP has come down. This means the ability of economic agents to service debt also is reducing, at least in some pockets. This signified that you have to be very careful in terms of choosing what kind of debt strategy you play as investor.
We think the balance today is tilting toward a duration play rather than a credit play, in India.
Arun: India’s household financial savings is about USD 150 billion per year whereas combined assets in the Indian mutual fund industry is about USD 200 billion. The industry has picked up flows over the last year and so. The last few months have showed an average net inflow (inclusive of systematic commitments) of about USD 1 billion per month in equity schemes. However, it's still below the potential. Investments from the household sector can possibly complement FII flows. FIIs invest on an average about USD 13 billion to USD 15 billion in equities per year. Domestic investments into financial assets can significantly go up from the current low levels. At present, Indians have a high inclination towards investing in physical assets. In India, equity assets total about USD 300 billion you can say, whereas gold is estimated to be about USD 1.5 trillion and real estate is estimated at about USD 12 trillion. While we are quite happy about the way things have started picking up in the last one year, much needs to be done in this space. Hopefully, with more people becoming aware of the potential returns and benefits, more people are likely to invest, which should go very well for the markets.
We have been optimistic about equity markets for a while now and will hold on to our optimism, regardless of global volatility resulting from the situation in Greece yesterday, China today or the Middle East tomorrow. These things cannot be anticipated or planned for. Our fundamentals are fairly robust and we have seen a lot of macro improvements. Inflation has come down, the government is making visible efforts for fiscal consolidation and reducing the current account deficit, been fiscally prudent by reducing spending on the populous subsidy schemes which is a good thing from a market perspective. What is important now is the implementation of the reforms which will help the earnings to pick up.
As far as fixed income markets are concerned, we are in a very sweet spot. Unlike equities, we are not dependent on foreign flow as the overall fixed income exposure of foreign investors is only about 2% of the outstanding holdings. As a result, it is more domestic focused. The real yield across the curve has been positive and relatively high, making us optimistic on the fixed income space.
Ashish: Whenever there is a crisis that hits the shores, there is some kind of trigger. A 6% fall in the market in a single day in China is definitely a big trigger that points to the fact that there are definitely some serious issues out there. I think it would be very unrealistic to assume that we have heard the last of it and from here on there is going to be a V-shaped bounce back. This is not the last of it – in fact, this is the beginning of what has started to emerge. Over the next six months to a year, there is going to be a lot of turbulence as far as global factors are concerned. Only when the US does actually get into a lift off, the deep issues related to China will be discovered and the related domino effects will be felt. China is a major trading partner because it is a major consumer & supplier of a variety of products. The first time the market falls 6%, you don’t see the complete spectrum of damage but I think there is going to be a good amount of domino effect and there will be collateral damage.
As far as next few days or few weeks are concerned we would be circumspect and closely watch what is happening. As far as India is concerned, somebody recently joked that there are more number of traders who have been waiting for it to rain than there are actual farmers who have been waiting for it to rain. That's just an indication of the kind of scenario we have. The best of fund managers and analysts today constantly complain about the hawkish nature of the RBI governor, that the government is not delivering, and about the uncertainty in China.
Since the time the new government was formed last year, a lot of people have positioned their portfolios for a high beta kind of activity, which is not totally wrong. Last year, just before the election results came, April and May 2014, the Indian equity market was absolutely indiscriminate. It didn't matter what stock you were holding, everything was just flying. Then, all of a sudden, there was this feeling that the government isn’t delivering, it is not raining enough, the RBI is hawkish, the international scenario is not playing out as per as expectations and so on. There is a huge number of people who have positioned portfolios for a certain kind of environment and they have invested in a lot of companies where the locus of control is in the environment and not in the company itself. A lot people have made investments based on a top-down macro analysis and the environment is not very suitable at the moment. The next one year is going to produce mixed results and people will have a tough time, depending on what they’ve bought and where they are invested.