As the valuations of Indian equities turn dear and there is talk of asset bubbles forming in the emerging markets, Jitendra Kumar Gupta speaks to Noriko Kuroki, client portfolio manager of JPMorgan’s global emerging markets, seeking her views on the subject. Edited excerpts:
Why should one invest in an offshore fund, when India offers a lot of opportunities?
The fund will provide diversification and investors can expect better risk-adjusted returns. We cannot time the market, but in certain periods one country could do better than the other. But a combination of different countries’ markets, especially the emerging markets, would not only give diversification but better risk-adjusted compounded returns. That is because the downside risk related to a particular market will be offset by better performance of the other.
Do you see any possibility of bubble formation in the emerging markets?
There is a risk of bubbles forming, but valuations are your only friend. Emerging markets as a whole are trading at two times their book value, which is in line with the historical average. Despite all the talk of bubbles, the valuations are fair. We are nowhere near those 2007 levels.
What is your view of the Indian market?
India is the most expensive within the emerging markets. There is less room for further re-rating. The Indian companies have a huge challenge to meet these expectations in terms of earnings growth. Apart from the valuations, short-term headwinds are monetary tightening in India, because inflation is not slowing down. The rally is largely driven by strong inflows. FIIs have invested about $22 billion in the Indian markets, though there are some justifications.
What themes do you like in emerging markets like India?
We like infrastructure and consumption themes. Another area where we could be overweight is the financial sector. Considering that the penetration of financial services in emerging markets is very low and the population is large, there are huge opportunities.
Do you think hot money is driving the markets?
Actually, we have seen a lot of institutional clients like pension funds investing their money. They use to have this mentality that the US is the world, therefore, why should we care about the rest of the world? But, now they see the big benefits of diversification. There is a structural shift in asset allocation, which is going to continue. Also, still these pension funds are underweight in emerging markets, so there is more to go. So , there will be long-term money sticking to the emerging markets, believing in their growth story. Also, the investing universe (the number of companies) has broadened considerably, which has helped in absorbing the liquidity.
China recently raised its policy rates. Does it worry you, and could it play a spoilsport for the rest of the emerging markets?
It only impacts the sentiment, resulting in an intermediate correction in the near term. China wants to control its own destiny and they want to be in the driving seat, especially the Chinese leaders. They want to diversify their economy, in terms of one driven more by domestic consumption. But, at the same time they do not want to hurt their manufacturing sector and retain employment, which is why they are trying to diversify resources towards domestic consumption. China does not want their economy to decelerate sharply; their best interest is in a soft landing.
China’s weightage in the global funds is almost double that of India. What trend do you see going forward?
There has been a lot of listing of state-owned companies in China, whereas India is in the process of listing some of the national companies, which would help in broadening the investing universe. So yes, there is a good chance that India can actually catch up.