We are underweight on India in our Asian funds, says Geoff Lewis

There appears to have been less selling pressure from domestic investors in equity mutual funds, he said

Hong Kong-based GEOFF LEWIS, senior strategist for Asia at Manulife Asset Management that has nearly $394 billion worth of assets under management, talks to Puneet Wadhwa on the road ahead for global financial markets and his sector preferences in India. Edited excerpts:

How do you see equities playing out over the next one year? 

What we are seeing is more likely an extended correction and not the start of a bear market. While risks appear to have multiplied lately, global growth continues to draw fundamental support from the US and China. It would seem strange to us if global growth close to 4 per cent and an earnings recovery in all regions were to be accompanied by a bear market in stocks.

The US Fed remains committed to a gradual path of tightening. We, thus, expect two more rate hikes this year, in June and September, followed by another two in 2019. Over a longer period (12-month horizon), we would be overweight Europe, Australasia and Far East (EAFE) and emerging markets (EM), as non-US markets are behind in their business cycles, and thus, have greater scope for earnings to catch up.

What about the EMs?

EM equities have admittedly struggled for several months. We believe this is primarily due to the rebound in the US dollar from the recent three-year lows, leading markets to extrapolate a further sustained appreciation leg. As the dollar index (DXY) loses momentum, sentiment towards EMs should stabilise and later improve, especially if we also start to see better economic data from Europe and Japan.

Recently, a prominent fear has emerged that global liquidity conditions are about to tighten dramatically, given further US Fed rate hikes and the progressive reversal of quantitative easing (QE), to the detriment of EM companies that have borrowed in US dollars. We think such fears are exaggerated. 

What is your view on India? 

In May, India, like other regional markets, saw foreign portfolio outflows of around $1.4 billion, and foreign investors now own 44.2 per cent of free float (FF) market-cap, down from 45.6 per cent a year ago. Encouragingly, there appears to have been less selling pressure from domestic investors in equity mutual funds. We are currently underweight on India in our Asian regional funds, largely a reflection of India’s valuation premium to 

the region.  

How are foreign investors interpreting India’s macroeconomic situation?

What were tailwinds for the Indian economy last year have since become headwinds, leading to fears of higher trade deficits, inflation and domestic interest rates. Whilst India’s twin deficits are a cause of concern, we still think that slippage in the fiscal deficit and current account deficit will be contained at 3.5 per cent and 2.5 per cent of GDP, respectively. It appears to us that markets have priced in many of the recent macro concerns. India’s growth trajectory is unlikely to be derailed by a moderate tightening in the monetary policy, although oil prices above $80 per barrel remains a significant risk.  

How big is a threat the inclusion of Chinese stocks in MSCI for India?

On full A-share inclusion, China’s weight is projected to increase dramatically from around 30 per cent to over 40 per cent. However, this is likely to be spread over a fairly long interval — five to 10 years — taking earlier inclusions of (South) Korea and Taiwan as a precedent. MSCI can be expected to take whatever steps are necessary to ensure a smooth transition over time with minimal disruption to markets.

Which sectors in India are still worthy of investment?

Good opportunities are to be found in the organised retail, private sector banks, and real estate sectors. We tactically also like downstream oil companies. On a one-year outlook, we also like information technology, which is exposed to the US tech spending. Despite higher valuations, we still like consumer stocks as we expect rural India to benefit from increased government spending. 

We believe two of the earlier longer-term trends that we were playing are undergoing a slowdown. While we believe that formalisation of the economy should improve household financial savings in the long run, it seems to have peaked for now. We also believed that recapitalisation of public sector banks (PSBs) will re-vitalise the credit flow in the economy. This may see a slowdown, as the recent fraud in the second largest PSB (Punjab National Bank), is likely to make the PSBs as a whole more risk averse and to increase scrutiny of credit applications in the corporate and small and medium enterprises book.