 "Recovery in Indian equities may take a while: Alice Brader")
Alice Brader, vice-president (client portfolio manager, Pacific region), JP Morgan Asset Management, in an interview with Chandan Kishore Kant, says a lot of bad news has been priced into Indian stock valuations. Edited excerpts:
Amid the prevailing global pessimism, how are your clients looking at equities?
Most investors are still very fixed-income heavy. I wouldn’t necessarily say the rush out of fixed income into equities has happened yet. Judging from the level of activity, we feel people should again start looking at equities seriously. Though clients are willing to look at equity as an asset class, people have been selectively investing in high-yield or income-type equity products. So, you are investing effectively in a type of equity that is relatively defensive. While it gives some a steady monthly income stream, investors also have some direct equity market exposure. They would not participate as much as a benchmark index might. But those are the kind of products people would be very interested in, from a flows perspective.
What is your outlook for Indian equities?
Would FIIs (foreign institutional investors) continue to allocate more to India, compared to other emerging markets?
A lot of foreign investors see India as a risk-on, risk-off trade. So, if risk appetite increases, Indian markets would be a beneficiary of those flows. And, if there is a risk-off appetite, you may see some of these flows reverse. I would also make the case that through the last few years, some FII flows into India might have resulted from the relatively low confidence in the Chinese economy seeing a sustained recovery. Indirectly, India might have been a recipient of this kind of funds.
JP Morgan’s Greater China Fund and the Asean Fund have been around for some time. How are you positioning these?
Effectively, the Greater China Fund invests in three countries —China, Hong Kong and Taiwan. The performances are measured against the benchmarks, 50 per cent of which is in China and 25 per cent each in Taiwan and Hong Kong. For the Asean Fund, the investment universe is a little bit broader. The countries this invests in are Thailand, Indonesia, Singapore, Malaysia and the Philippines; we are also adding some exposure to Vietnam. These offshore funds offer diversification benefits to Indian clients because as we have learnt, and rightly so, Indians have a large home bias when it comes to investing in Indian equities. Still, notwithstanding the market volatility in the last few years, it is important to diversify your asset base; look at opportunities elsewhere as well, not just Indian equities.
Would the heightened tension in the Korean peninsula have a significant impact on markets?
Everything in politics is unpredictable. We have seen this from North Korea earlier, too. So, without wishing to say it is not going to happen, we have seen it before — it is something everybody in the market is faced with. This would lead to volatility in equity prices, which is a reality of equity investing.
Would investors be comfortable putting money in Asia if the political situation worsens?
If you look at the trend, especially the long-term trend, through the last few years, we have seen investments coming out of the Asia markets and going into the broader mandate, such as global emerging markets. What is changing now is people’s perception about Asia; people are re-looking at Asia as an asset class. But at the end of the day, it is a risk-reward trade off. Investors are still looking at much higher GDP numbers in Asia than in the developed world. But of course, you are taking a fair share of risks associated with the type of growth here---political and economic risks. It is a reality that North Korea has done it before; the geo-political situation in Asia is something we have to live with for sometime to come. But is it so different to what happened to Greece? Is it so different to what happened in Cyprus? It causes an equal amount of angst among international investors.
Was the recent Bank of Japan development a positive surprise for you?
For us, Japan was certainly a positive development. There are a few factors coming together, making Japan a much more attractive investment destination. This is because though politics was always difficult in Japan, now, that country appears to have some measure of political unity. The change in inflation expectations in Japan is also positive for the markets. Also, the yen has weakened, which is hugely positive for corporate earnings in Japan. All these factors would help boost companies’ bottom line earnings.
Amid the prevailing global pessimism, how are your clients looking at equities?
Most investors are still very fixed-income heavy. I wouldn’t necessarily say the rush out of fixed income into equities has happened yet. Judging from the level of activity, we feel people should again start looking at equities seriously. Though clients are willing to look at equity as an asset class, people have been selectively investing in high-yield or income-type equity products. So, you are investing effectively in a type of equity that is relatively defensive. While it gives some a steady monthly income stream, investors also have some direct equity market exposure. They would not participate as much as a benchmark index might. But those are the kind of products people would be very interested in, from a flows perspective.
What is your outlook for Indian equities?
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A lot of bad news has probably been priced in, especially with regards to India’s macro challenges. Valuations are slightly below their long-time averages, which is reasonable. I see some attractive opportunities in the Indian mid- and small-cap stocks. Investment communities’ expectations from GDP (gross domestic product) and earnings growth are relatively sanguine. So, that gives us some comfort. We feel there would be a recovery further down the line. But it would probably take a while.
Would FIIs (foreign institutional investors) continue to allocate more to India, compared to other emerging markets?
A lot of foreign investors see India as a risk-on, risk-off trade. So, if risk appetite increases, Indian markets would be a beneficiary of those flows. And, if there is a risk-off appetite, you may see some of these flows reverse. I would also make the case that through the last few years, some FII flows into India might have resulted from the relatively low confidence in the Chinese economy seeing a sustained recovery. Indirectly, India might have been a recipient of this kind of funds.
JP Morgan’s Greater China Fund and the Asean Fund have been around for some time. How are you positioning these?
Effectively, the Greater China Fund invests in three countries —China, Hong Kong and Taiwan. The performances are measured against the benchmarks, 50 per cent of which is in China and 25 per cent each in Taiwan and Hong Kong. For the Asean Fund, the investment universe is a little bit broader. The countries this invests in are Thailand, Indonesia, Singapore, Malaysia and the Philippines; we are also adding some exposure to Vietnam. These offshore funds offer diversification benefits to Indian clients because as we have learnt, and rightly so, Indians have a large home bias when it comes to investing in Indian equities. Still, notwithstanding the market volatility in the last few years, it is important to diversify your asset base; look at opportunities elsewhere as well, not just Indian equities.
Would the heightened tension in the Korean peninsula have a significant impact on markets?
Everything in politics is unpredictable. We have seen this from North Korea earlier, too. So, without wishing to say it is not going to happen, we have seen it before — it is something everybody in the market is faced with. This would lead to volatility in equity prices, which is a reality of equity investing.
Would investors be comfortable putting money in Asia if the political situation worsens?
If you look at the trend, especially the long-term trend, through the last few years, we have seen investments coming out of the Asia markets and going into the broader mandate, such as global emerging markets. What is changing now is people’s perception about Asia; people are re-looking at Asia as an asset class. But at the end of the day, it is a risk-reward trade off. Investors are still looking at much higher GDP numbers in Asia than in the developed world. But of course, you are taking a fair share of risks associated with the type of growth here---political and economic risks. It is a reality that North Korea has done it before; the geo-political situation in Asia is something we have to live with for sometime to come. But is it so different to what happened to Greece? Is it so different to what happened in Cyprus? It causes an equal amount of angst among international investors.
Was the recent Bank of Japan development a positive surprise for you?
For us, Japan was certainly a positive development. There are a few factors coming together, making Japan a much more attractive investment destination. This is because though politics was always difficult in Japan, now, that country appears to have some measure of political unity. The change in inflation expectations in Japan is also positive for the markets. Also, the yen has weakened, which is hugely positive for corporate earnings in Japan. All these factors would help boost companies’ bottom line earnings.