A couple of investment conferences I attended in the US last week focused on real money investors and sophisticated limited partners. In the conferences, which were global in nature and discussed investment opportunities across asset classes, I participated mainly in the sessions on emerging markets, speaking on India.
It was an interesting experience to be in the US at a time of global angst, and when significant pools of long-term money were discussing their world view, current positioning and long-term direction.
Some of the key takeaways are as follows:
(i) This is not 2008; nobody has the kind of leverage and complacency exhibited then. Most large family offices or endowments have liquidity and are not caught in the kind of asset-liability mismatch they were in 2008. They are far more aware of the downside risks, and have tilted their portfolios accordingly. Their exposure to illiquid assets is also more balanced. Pretty much irrespective of what happens in Europe, it’s unlikely that we will see the kind of wave of forced redemptions we saw in 2008. Private-bank driven funds, which led these redemptions in 2008, are far smaller now, with far less leverage. Therefore, for a market like India, I don’t think we have to fear another year of $15 billion-plus in equity market outflows. India is also far less owned and loved today than in 2008, when we were coming off a five-year bull market and even global macro funds were positioned into Indian mid-cap stocks. Markets can come down, but they are unlikely to spiral down owing to excess leverage or overaggressive positioning. The positioning across investors is far more risk-averse than in 2008, when most were caught unprepared.
(ii) India is massively out of fashion. Most investors had no real interest in hearing about India, and the long-term bull case. In fact at a large India conference held in New York recently, attendance was at a record low, and even senior government officials had few investors interested in meeting them. People were disappointed about inflation, its stickiness on the way down and how the Reserve Bank of India was fighting a lone battle using only one policy instrument — interest rates. Investors also questioned how rates and inflation would come down since most thought much of the inflation was structural. Food prices will remain high, given the increase in purchasing power in rural India and the need for protein. Nothing is happening on the supply side through policy response that could boost productivity. Though people did acknowledge how India would benefit from falling commodity prices, most of those gains were wiped out by rupee depreciation. Most did not see a case for interest rates to come down significantly, and in a hurry. Also, there was tremendous disappointment about the perceived lack of governance in Delhi. Most were fully aware of the sense of policy drift in the country and highlighted the lack of confidence visible in India Inc, something they had never seen before. I was questioned for the first time how the country could sustain eight per cent as its long-term trend line, given the state of affairs. Many thought India would be lucky to sustain seven per cent (still good by global standards but disappointing for India). Many investors were aware of the societal type of transition India now seems to be starting, but seemed worried about the economic costs of such a transition. It is very hard to boot out vested interests. One or two savvy investors pointed out India’s hostile business environment, citing the case of Qualcomm and Cairn. This particular investor thought that global corporations would have to raise their risk premium and hence hurdle rates of return for India. Markets were also perceived to be overpriced, still trading at a premium of 25 to 30 per cent for their Asian peers. There seemed to be little appetite to increase allocations to India. Now all these could be contrary indicators, but it looks unlikely that India will see huge inflows soon, at least not until the markets begin to move upwards and show price momentum. However, most thought greater confidence in governance and policy action was critical to changing their view.
(iii) Though most admitted they were underweight emerging markets in their current asset allocation, they saw this going up in the coming years. Many acknowledged that this was a good time to increase emerging market weights, but pointed out the difficulties in getting this through investment committees when the US and EU equity markets also looked very cheap. There was still enough risk aversion in the air, to short-circuit big asset allocation shifts of this type.
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(iv) Most were very bearish about China, convinced that something bad was bound to happen there. They specifically pointed to the property market and property developers and thought China could very easily disappoint on growth. Most thought that economic conditions were far worse than the statistics seemed to indicate.
(v) Governance was panned universally. India was clearly not an outlier here, as investors ranted about poor leadership even in the United States and the EU. Most attributed the weak markets in the US to the shocking gamesmanship around the debt ceiling debate, and people seemed to have given up on Europe owing to the inability of its politicians to understand the magnitude of the problem. Markets would have to riot to force EU political leadership to do the needful.
(vi) Nobody seemed positioned for a strong risk rally and a short-and- quick market bounce back. Most investors still believe that markets will need to continue to riot, forcing policy makers to do the needful on both sides of the Atlantic. Nobody believes any rally will have significant legs.
All in all, it was an interesting bunch of interactions. Investors are far more aware today than a few years back. India has also received a great deal of negative publicity in the mainstream western media, and most were aware of the challenges facing the country over the coming years. Maybe there was a sense of risk aversion in the air, but time horizons for most investors had shortened considerably, and nobody was really willing to take a medium- to long-term perspective on India. The country has clearly lost some goodwill and investors are less willing to give it the benefit of the doubt. We will need to work to regain this faith.
The author is fund manager and CEO of Amansa Capital
akashprakash@amansacapital.com