India continues to be one of stronger markets among Asian Ems: Ritu Arora

We are assuming that the Covid impact would be for the next couple of quarters, while the economy will remain largely resilient over the long term, says CEO Arora

With the markets ruling near record highs, Singapore-based Ritu Arora, chief executive officer and chief information officer, Asia, Allianz Investment Management, tells Puneet Wadhwa in an interview that the upside-specific trigger for India can come from a strong pick-up in economic growth, led by pent-up consumer demand and an improvement in credit demand. Edited excerpts:
 
How are investors viewing India as an investment destination with indices at record highs?
 
Investors continue to view India as a structurally strong story, hence there has been a limited impact of the recent health emergency on its stock indices. We are assuming that the Covid impact would be for the next couple of quarters, while the economy will remain largely resilient over the long term. The upside-specific trigger for India can come from a strong pick-up in economic growth, led by pent-up consumer demand and an improvement in credit demand. India still continues to look to be a strong destination for FIIs /FPIs due to several uniqu­e factors such as favourable demographics, long-term growth trajectory, and high quality corporates among others.

 

Besides India, which other Asian markets look investment-worthy?
 
India continues to be one of the stronger markets among Asian emerging markets (EMs). Within the broader EM space in Asia, we like China. It has had a stellar record in terms of containment of Covid-19, the economy continues to be quite robust and policymaking is still orthodox. As China opens its financial markets further, flows to that market will remain quite strong. Vietnam is also one of the really bright spots in Asia. We see large businesses with China-dependent supply chains moving to a China+1 or China+2 model. Within Asia, we see Vietnam as the major beneficiary of this diversification of supply chains.

 
Are you not concerned about the market valuations?
 
Indian equities do look expe­n­sive from a valuation perspective and, therefore, we believe that on a headline basis, it might be difficult for the markets to keep making new highs for a sustained period. But there are definitely sector-rotation possibilities, which is where we believe opportunities lie, going forward. A recovery trade led by financials, information technology (IT), commodities, capital goods, and logistics is to look out for.
 
Which sectors are investment-worthy in the Indian context?
 
Financials, IT, commodities, logistics, and capital goods can make for good investment opportunities. Beyond these sectors, as the recovery picks, the industrials/manufacturing sector will also start to look attractive. Amongst the sectors which have already been the hardest hit by the Covid-19 cycle, one has to adopt a bottom-up investment approach. The call should be made based on the strength of the balance sheet in light of the challenges caused by Covid-19, and the long-term prospects of the underlying business in a post-Covid-19 world.

 
Do you expect the policymakers in India to roll out more stimulus measures in FY22 to help the economy?
 
It is inevitable that more fiscal measures will be required to support the Indian economy. But there will be a limit as to how much support the Indian government can provide. Out-of-the-box solutions will need to be developed. India needs to start incentivising savings again, as the savings rate in the economy has fallen dramatically. Domestic savings and investments need to be channelised to important sectors through InvITs, REITs, etc. The government may consider tax benefits/exemptions on such investments to popularise them.

 
Will the markets be able to absorb the dent, if any, as a result of the fiscal situation?
 
Supportive fiscal policy to reduce the economic impacts of Covid-19 is desirable, and being provided by all the governments in different forms and quantum. However, it is the monetary policy area where emerging markets could face challenges, ahead in light of rising inflationary expectations. If inflation indeed turns out to be non-transitory, policymaking for central banks is likely to get very challenging. They will be forced to make the impossible choice, raise rates to defend the currency, and let the economy suffer, or let currency move towards a significant devaluation and let the economy suffer. The road to recovery is thus going to be bumpy.

 
Do you expect the US Federal Reserve (US Fed) to start tapering liquidity sooner than expected?
 
There is enough global liquidity priming the international financial markets. As the Covid-19 crisis deepened, the US Fed introduced measures such as lower rates and purchases of bonds including fallen angels. There was a downward shift in the risk-return spectrum. This led to a chase for yields and consequently compression of spreads. Stock markets have also been particularly strong. Globally, we are not in that scenario where economic recovery can sustain on its own. It still needs a lot of fiscal and monetary support. The US Fed is likely to continue providing monetary support. Our base case is that the inflationary pressures are transitory. One will have to watch how inflation moves over the next few months and how the economic recovery stacks up.