How things are moving in terms of inflation and emerging market currencies, what is your sense for what lies ahead now?
I think we can expect more of the same. Softening of demand or recessionary concerns are now on our mind but they are very much two sides of the same coin.
I think India as a whole has done a very good job recovering from the restrictions that COVID placed it under and when I visited in July, India had recovered to a very healthy level of demand, commerce and vibrancy something that was not always apparent in the rest of the region.
So I think it is only natural with this recovery and the health of the demand that inflationary pressures would build given the strains that you see in global supply chains and in the Ukrainian crisis. So we have now cause for concern on how deep and how prolonged the softening on demand would be going into 2023.
On a relative basis this year India has done exceedingly well but on an absolute basis the returns are not there, do you think that really sets the tone for absolute double digit returns in coming year?
I think it is very dependent on which vertical or which segment that you are talking about. I think in consumer discretionary and consumer staples for example the underlying health of demand has actually been pretty steady throughout the last few quarters. Whether this sustained strength will continue it is difficult to predict with the inflationary pressures that we are now seeing.
In certain segments, for example, in energy you also see some strong numbers being posted due to the supply constraints and the margins being preserved as the cost of these high input prices is passed on to the consumer. So I think we have to go on a segment by segment basis. Things are promising enough that I think that India would be one of the places, one of the markets where there is better than average chance of a more broad-based recovery and more broad-based earnings when compared to the rest of the region. But like you highlighted earlier, inflationary and recessionary stresses remain present and we will have to monitor that going forward.
The good old debate of India versus China has started again. The China bulls are of the view that Chinese markets are cheap, China will open up and that really could be the best trade for 2023. The India bulls are insisting that there are structural problems with China, investing in Chinese has not been a great experience for global investors so they will be forced to stay in India. Where are you on that debate – India bull or a China bear?
I am greedy for both the economies. I think that both economies are not perfect, there are some structural strains and structural disadvantages in both these countries. But both of them have a lot of promise and over the last decade or two we have seen both of these countries move in great strides not only in squeezing out very strong steady high levels of growth but also spreading that quite broadly across its population and across its demographic base.
So I am not of the view that you need to choose between one or the other. In the Asia-Pacific region if you look at our weights for the Asia ex-Japan universe, we have a lot in China and we have a lot in India as well and there are certain strengths that lead to the Chinese market. We like some of their giants in the internet and the e-commerce space.
There are some strengths in India for example we like a lot of the financial groups. Some of the financial groups in India have done tremendous job for not just majority shareholders but minorities as well.
We think that Chinese internet and India banks for example are not necessarily a zero-sum game where you have one you do not need to have any exposure in the other. They are not direct trade offs and we can see a case where over the medium and long term both will drive ahead. I think it is an interesting question but I do not think there is an easy answer for that question.
So over the course of next couple of quarters are you looking at maintaining your India exposure or could it be going up also?
I think we are maintaining where we are at this point in time. In the regional portfolios we are a slight overweight and then we also have single country funds which are fully committed to India. So we are not sitting on a lot of cash.
What happens over the next two quarters is really dependent on what we see in the market. There has been a lot of volatility especially in 2022 as well and hence it is very difficult to predict a trend going forward.
There are some macroeconomic issues that we need to be mindful of, so inflation, recessionary fears are some of those factors. We like the stocks that we are backing but the exact weights we may adjust around a little bit in light of the volatility and the uncertainty that we expect going forward.
It has been a blowout year for Indian financials and especially PSU banks. As an investor do you see that the Indian credit plus the banking cycle is there for the next two or three years?
It has been a sector that has not performed as well as we would have liked. We are investors in
, and these are banking franchises, banking groups that we like a lot. We have known them over the years and they have always been very clear about what they want to do which is to provide financial services of the best quality for the market at a reasonable price.
The credit growth is not as exciting as it could be or as it should be but we think that that would recover over the next two year timeframe. But valuations are not as demanding as they used to be when you go back three, four years when we were in a more exuberant part of the credit cycle. So I think it is a reasonable trade off and we continue to back the Indian banking sector but it has to be on selective stocks. We do not buy a basket that follows the benchmark.
Give us some clarity on how Bank and HDFC Ltd merger should be treated? Would you be open to increasing your weightage going beyond 10% in the combined entity?
That is possible. We are mindful of what the benchmark is but that does not dictate the level of conviction that we have in a particular stock. The other issue is that for some of our funds we do have constraints on whether we can hold a single stock beyond 10% in some jurisdictions. So that is something that we need to revisit but in terms of absolute quality in relation to the market we do like that combined entity a lot.
Investor in both HDFC Bank and HDFC Ltd?
Yes, before the announcement was made to integrate both operations we have been investors in both HDFC and HDFC Bank separately as well and looking ahead to the merged entity we will continue to be investors in the bank.
When I look at your public portfolio it has names like , PB Infotech or . Now you have invested into these stocks almost when they went public and a lot has changed after that. How would you assess these businesses?
They are very challenging businesses and they also provide an alternative in the Indian space that has not existed before. So the Indian internet boom attracted a lot of private capital over the last five, eight years and actually it went further back than that. We hold InfoEdge as well but the recent round of public IPOs in the internet space has allowed the capital markets universe in India to provide a new diversified offerings within the internet space.
We like some of these business models. We appreciate that they are pre-profit with a two, three year timeframe towards breakeven so we are mindful of the risk and we have taken a relatively modest position.
So unlike the likes of HDFC and HDFC Bank which sometimes in aggregate are close to 10% or even more within our funds that invest in India only, collectively all these internet stocks would not be more than 3% of the Indian funds.
So they are relatively modest positions but we go through the same diligence that we do for all our stocks.
The internet stocks that we have invested in have got big cash reserves where they are able to withstand a prolonged period of recession or demonstrate financial resilience in what could be turbulent times going forward and we analyse and take all these into account and therefore we come to those names that you mentioned. Is it a difficult period of time over the short term, yes it is because some of these operational parameters have become quite challenging during the last 12 months but we think that these companies have a very good chance of executing on their business models and that is why we remain invested in these stocks.
There were a lot of anchor investors and a lot of PE investors who have been selling their stakes down, some because of compulsion and others because of choice. Have you increased your exposure more in any of the consumer tech or fintech Indian stocks?
Yes, it has been a mix. I would not go into details here but it is a mix, for those that have executed as they have guided us on and guided the market on and they have delivered on the parameters that they focus on. We have been adding and for those that have fallen short in the medium term we have been reducing. But that happens to all the stocks that we invest in, not just the internet space. Maybe there is more anxiety surrounding the internet stocks given that they are pre profit companies but we hold them to the same levels of accountability for their business models and their execution.
At Aberdeen Asset Management you have taken big bets and you have been with those companies and with those sectors through thick and thin irrespective of the short term quarterly update whether it is IT or banks. Do you see visibility for three to five years in some of the internet companies that you are ready to ride the thick and thin?
We do not try and change our names very often but we do adjust the weights that we hold in these companies. There will be adjustments to the portfolio depending on how they perform with respect to the market and their competitive landscape. They are not at the same level of visibility in the P for profit companies that you get with some of the more established companies like HDFC or HDFC Bank and that is why we need to moderate the risk by making sure that active weights are more measured and usually smaller than some of the large cap holdings with better visibility.
The other pocket of fear this time around is IT. IT stocks are getting smashed like never before. Even though IT companies are doing a buyback, markets are disregarding them. At what juncture do you think the risk reward ratio for investor like you becomes favourable in investing in large cap IT?
We still have a large position in some of the stocks there. I appreciate that the sector is going through a difficult time but we still have quite a bit in
and as well.
I am not saying all IT stocks but for stocks like Infosys and TCS, we are confident that they will continue to generate very strong free cash flows not just operational cash flows but free cash flows that will cover their capex investment, their R&D and their longer term structural cost consistently over the next few years going forward.
So I hesitate to simplify the answer but I think that for us as long as Infosys and
continue to focus on what they do well and execute like what they have done we will remain investors in those stocks.
When you are looking at the India portfolio and if the starting point let us say is today, do you think there is a strong possibility that we could get absolute returns between 12% to 15% for next three to five years?
I think over the long term you can say that the Indian market will do that but you need to adjust for currencies and other things as well. Our more immediate aim is to outperform the benchmark over the medium and long term and depending on the risk constraints that are placed on us by our clients that degree of outperformance would vary and would be dependent on the time frame that they look out for. So you know we do expect the Indian market over the long term to do well and as active managers we do expect to work hard to make sure that we outperform that benchmark as well. But for an absolute 13%, 15%, 12%, 17% that is a very difficult call to make and I think in this current climate nobody would guarantee numbers like that.
2022 in a sense has been a tough year for foreign investors. Markets like India have seen net outflows from the foreign investors. Do you see that changing in 2023 as the world normalises and as interest rates in the western world peaks out?
There is a decent chance that would happen but it also depends on the recovery of not just one market. Globally you are seeing that equity capital markets are having a difficult time as interest rates are rising and the hurdle for performance has gone up. So there is a greater shift towards less volatility and more prudent stance in people’s investment portfolio.
I think India would stand a good chance of competing for regional or global capital but it needs to demonstrate a resilient level of growth and that balance cannot be taken for granted in light of the interest rate and inflationary pressures.
I think India is reasonably positioned for recovery in sentiment but the exact pace and the exact size of the recovery in sentiment is difficult to predict.
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