Govt measures don't address slowing consumption demand, says Matt Wacher

The reduction in the corporation tax will boost earnings, but for sustained growth there needs to be a revival in consumption demand, says Matt Wacher, chief investment officer (Asia Pacific), Morningstar’s Investment Management Group. In an interview with Samie Modak, Wacher says the investment manager is underweight on India. Edited excerpts:

Developed markets have been outperforming emerging markets (EMs). Do you expect this trend to continue?

Over the past 10 years, EM returns have trailed developed market returns. Indian equities have underperformed US equities, even in local currency terms because of external concerns such as trade wars and rising US interest rates, which impact EMs more than the developed markets.

Within the EM pack, which countries look most promising and why? 

EM equities have encountered a challenging period, with the trade war denting sentiments for key exporting nations such as China, South Korea and Taiwan. 

This has made valuations more favourable compared to the developed markets. Returns can improve as investors become overly pessimistic in their outlook. 

We continue to like some EMs. Our order of preference within the EM equities is EM Europe, then EM Asia, with EM Latin America being least preferred.

How does India compare to other EMs? 

With the EM pack, India features somewhere in the middle. We are underweight on Indian equities, particularly the mid- and small-caps. 

We believe investors are unaware of the cash flow generation and the lower return on equity that these firms offer. Rather, investors are relying on the benefits of future growth opportunities to stoke returns. 

In our view, this is not good investor behaviour and we refrain from investing in expensive assets hoping for growth to materialise. We look for assets that are priced below their intrinsic value and offer attractive margins of safety. 

However, our valuation-driven asset allocation process signals value opportunity in the Indian equity markets after the recent downturn. 

Several large and small-cap stocks are now more attractive than they were at the start of the year. With the return profile improving, we have recently reduced our underweight position on India. 
 

We think that corporate earnings growth will improve as domestic consumer demand, export, and government expenditure increase. 

This, along with the implementation of better reform measures and the fall in real interest rates, should bode well for the economy.

How would reduction in the corporation tax rate benefit the economy?

The Centre is trying to boost private capital investments that have witnessed a slow growth rate over the past few years. 

These measures don’t directly address the slowing consumption demand for various goods, such as automobile and consumer goods. 

It needs to be seen if the corporates will expand in a slowing consumption environment. This measure could boost corporate earnings but durable growth in earnings will require revival in consumption demand.