AIG Investments on Thursday launched its Infrastructure and Economic Reform fund, an open-ended equity scheme that will invest in companies that may benefit from investments in infrastructure and unfolding economic reforms without having any bias towards any sector or market capitalisation range. The new fund offer opens on January 10 and closes on January 31. Markus Schomer, managing director-global economic strategist, AIG Investments spoke to Priya Nadkarni on a range of issues including valuations in Indian markets, the de-coupling theory and the infrastructure space in India. Excerpts
How do you see the valuations in India and China?
There are two things: One, the Chinese market is less open and free than the Indian market. There are a lot of non-market factors that contribute to valuations in China.
Overvaluation is relative; the Indian market is overvalued compared with its own history, but compared to other Asian markets, I don't think it is overvalued. Markets overall are much higher valued than they ever used to be. Emerging markets are much higher valued than they used to be.
Emerging markets used to trade at a discount to developed markets, but that is not the case any more. Economic growth prospects are stronger now, especially in China and India, which have shown stronger growth.
So if you have lower volatility, faster growth and stronger profit growth, you can demand a higher valuation. Though the valuations look high historically, these economies can determine the terms of that valuation. When you look at all these things, the market do not seem as overvalued as the PEs would suggest.
How do you think the decoupling story is going to play out?
We believe in the decoupling story because we don't believe in the fact that the rest of the world can grow only as fast as the US. The US is not as important as it was because economies such as India and China are much stronger now.
If they continue to grow at 10 per cent year-on-year, they double in size and 10 per cent is lot more than the US growth of 3 per cent.
The theme of this fund is infrastructure. Many countries are beginning to focus on exports; it is a good way to accelerate economic development. If you focus on exports, you import technology and best practices as you compete with companies globally and that helps your own companies to become world class.
That has been the model in Asia for a long time, but not in India. Even in other parts of the world, the process has been more inward; stimulate domestic demand and invest in infrastructure. A lot of countries now have budget surpluses and sovereign wealth funds that will invest in major infrastructure projects- that will be the major theme for the next 10 years.
Which specific sectors would the fund invest in?
The fund would invest in infrastructure companies operating in, but not limited to power, oil and gas, telecom, water, housing, real estate, construction, roads, ports, airports, shipping and ship building, logistics and sectors that will benefit from the development in infrastructure such as cement, metals, capital goods and banking and financial services.
It will also invest in sectors that will benefit from on-going liberalisation in the Indian economy, including relaxation in foreign exchange controls, FDI in banking and financial services and any other industry or sector where there is a trend in favour of a freer market-based model such as retail, media, entertainment and mining.
Does that mean that the fund would invest in public sector or private sector companies?
The fund would invest in public sector companies since they are the ones that are mostly bogged down by the lack of reform. Private companies mostly play by the regulations.
