'Investors are now questioning emerging markets as an asset class'

Rupee weakness has been a very important factor for global investors to consider before putting their money in India, Mowat said

The recent economic growth indicators in India have been disappointing and have triggered a downward revision in forecast for the next financial year by a host of brokerages. ADRIAN MOWAT, chief strategist, CLSA tells Puneet Wadhwa that as things stand, he remains underweight on Indian equities. Edited excerpts:

What’s your view on emerging market (EM) equities?

Investors are now questioning emerging markets as an asset class. We have had the longest expansion in the US economy. EMs, on the other hand, have underperformed the US, Europe and Japan since the end of the global financial crisis (GFC). Global investors have a low positioning as regards EMs now, and India is absolutely bang in-line with that trend. When you ask how international investors are thinking about India, you need to first understand how they feel about the EMs. India is just a subset of that investment decision and how poorly EMs have been doing as an asset class. 

How disappointed are investors with the growth rates in India?

In the US, we have seen 8 per cent annualised growth in corporate earnings from December 2009-end compared to 4.6 per cent growth in EMs. India was at 6.6 per cent during this period. Rupee weakness has been a very important factor for global investors to consider before putting their money here. There is a certain degree of frustration now in terms of the Indian and Indonesian investment story. The EM and Indian growth is not being delivered in the way investors expected. 

Do you see a light at the end of the tunnel?

There have been three important headwinds. First is the trade war. The second is the road ahead for the Renminbi. The US dollar has been a boring currency to track. A third if the EM benchmark is China and Renminbi has dipped over 11 per cent from its 2018-peak. How the Renminbi performs going ahead will be a signal for turning bullish on EMs. The third factor to keep a track of is the semi-conductor sector in Taiwan and Korea. All these factors have made investors cynical and bearish about EMs that they are now questioning their investments here. 

Your current stance on India?

We remain underweight on India. My thinking is to maximize return for investors within an asset class and if there are better opportunities, some countries will remain underweight. So, while a market may go up, an underweight stance could imply that I can make more money elsewhere. As of now, there is more positive delta in the developed markets as compared to the ASEAN region and India. So, India remains an underweight while Korea, Taiwan and Russia are our overweights. We are also underweight on South Africa, Saudi Arabia, Thailand, Mexico, Indonesia, Malaysia and Philippines. On China and Brazil, we are neutral.

What will make you change this?

There are two ways that can happen. Either something specifically happens with India or my current overweights look less attractive. It is possible that the way capital markets pan out that the semi-conductor sector in Korea discounts the improvements very quickly. As a result, I can move my money out of there to India. Some of the cyclical factors in India also need to turn up. At the moment, the only sector where we feel the fall in interest rates could begin to translate into an early growth is the real estate sector – partly played though the hounding finance companies and party through cement. 

The S&P BSE Sensex has rallied over 4,000 points since its September 2019 low. Exuberance justified?

The big policy event was the cut in corporation tax in September. A of the rally since then reflects lower tax rates. That apart, global equity markets have also been on an uptrend. The up move since September seems rational. The active underweight bet in India at the moment is the information technology (IT) sector, as I prefer IT in north Asia. Consumer staples still remain expensive, but the dynamics that made them expensive are still in place. I am neutral on this segment. Investors can also tilt their portfolio to the real estate sector to some extent.

What’s your view on how the global equity markets have played out since the past few months?

It has been a decent year for the global financial markets on a year-to-date (YTD) basis. The AQWI (All-Market World Index) is up 19 per cent on YTD. In the US, Nasdaq has gained 28 per cent, while EMs, on average, have moved up 9 per cent. Nifty, however, has marginally underperformed the EMs, but that’s due to the 2 per cent weakening in the rupee (INR). That said, there had been a sell-off in the fourth quarter of the last financial year. So relative to the January 2018 market high, the above-mentioned gains will be trimmed.