 "Puneet Chaddha")
October has started on a negative note with the US government beginning a partial shutdown for the first time in 17 years. This comes ahead of the US Federal Reserve meeting later this month that will decide the future course of the bond buying taper.
Puneet Chaddha, CEO, HSBC AMC tells Puneet Wadhwa in an interview that a prolonged shutdown of the US will have ramifications on global risk and flows to the emerging markets. He maintains a cautiously optimistic view for the Indian markets in this backdrop. Edited excerpts:
The US government began a partial shutdown on Tuesday for the first time in 17 years. How concerned are you about this development and what are the likely implications for the global markets? Will it have a bearing on the US Federal Reserve's tapering off plans for the QE?
HSBC's view is that one needs to determine how it’s long this shutdown is going to last. If we just talk about a couple of days, we don’t think it will cause much disruption to the US economy and to the flows between emerging markets and advanced economies.
The longer this shutdown lasts, the more impact it will have on the US economy – it will have a direct impact on growth and lowered government spending also because it would start to build up high anxiety among businesses and consumers. And that could have a bigger implication for the US economy.
One of the more concerning outcomes would be if this shutdown lasts until the time the government runs out of money and we’re close to the Fed Debt ceiling being met. If that starts to happen, we can sense a rerun of what we’ve seen in the summer of 2011 where the global risk aversion pushed up; and that’s not positive for emerging market flows.
Do you think that the US Federal Reserve (US Fed) could either defer or significantly reduce the quantum of taper as and when it decides to implement its plans?
I don’t think we know what their quantum of tapering would be. So, it is difficult for us to say that they will reduce or postpone their plans to taper.
I think all along the message from the US Fed was and I think that this is something that the markets should understand – that the quantitative easing (QE) cannot be a perpetual arrangement. There has to be a point in time where QE has to be unwound.
The recent economic data from the US suggests that their economy is reviving, and we have already seen that in their stock market performance as well. Therefore, quite logically and naturally, the US Fed is thinking of phasing out the QE.
I am a bit disappointed that the world markets have taken this move extremely negatively even when the first announcement came out. Having it unwound sooner rather than later would be better as it may take uncertainty out of play.
Do you think that the party for global equity markets, especially in the Emerging Markets (EMs) is over; or have the markets have already factored in the worst?
I think that the markets have priced in the worst. It has been several months now since these comments regarding the taper were first made. So, to a very large extent the surprise element is gone. However, there might be some volatility as and when the actual tapering begins.
My own sense is that after an initial bout of volatility, the markets are likely to settle at the current levels if not higher because they will start to appreciate that there is significant amount of liquidity in the US even outside of the Quantitative Easing (QE) programme.
Banks and Corporate America are holding enormous cash in their balance sheets. It is much more than required. So, to that extent, I don’t think there could be much impact on the liquidity.
Why are emerging markets (EMs) getting impacted then?
The reason is lower liquidity will allow less money to flow into the EMs. Yes, possibly true if one views this in isolation. The amount of money to EMs may reduce because there is lower money supply in the US, but remember that the easing will take place when the US economy is strong enough.
This means that the natural cash flows may come out of the US and might be stronger as compared to where they are today. So, to that extent, it is likely to counter-balance this measure.
Secondly, EMs are extremely attractive in terms of valuation; and money will always flow to areas where there is good growth and opportunity. Thus, in my view, the QE taper is being over-hyped.
How India is likely to fare as compared to its other Asian and EM peers over the next one year given that we are heading into an election year?
My natural response would have been that as one nears election, policy decisions become fewer. However, what is being seen in India is a big move on the currency front. There is a perception that more could have been done on the policy front; and therefore there is a renewed sense of urgency in terms of proposals / policies being announced.
The best way to describe the market outlook is cautious optimism along with a lot of volatility. Clearly, there could be an impact of the decisions that are being taken now on the markets over the next 12 months.
Equally, there could be more decisions that will be announced over the next 12 months amid a political debate on the economic decisions that are being taken now. This may lead to some uncertainty in the minds of investors, who may wait to remain fence-sitters till the election results are announced.
How are you approaching this market in terms of portfolio allocation across sectors? Which sectors are you overweight and underweight on?
We like companies which are not exposed to very large regulatory changes, are less indebted and have inherent demand irrespective of where the economy goes. There are plenty of such companies and are now available at relatively better valuations because of the sharp correction.
At the moment we are overweight on information technology services not only because of the benefits these companies would derive from weaker rupee but also because of higher revenue growth due to improving US economy that is likely to aid discretionary IT spends.
We are also overweight on energy as we believe that the government seems open to oil price deregulation in the sector and even though globally the oil prices remain stubborn the trend overall seems to be on a downward trajectory.
As a portfolio strategy, how much should one allocate to debt now given the outlook for key macros like interest rates, inflation, growth etc?
One has to address this portfolio allocation strategy not only by looking at the attractiveness of the market but also the risk taking capacity of an individual and his/her time horizon.
So, anyone who can absorb high level of volatility, I think it is the right time to enter equities since the valuation of a lot of stocks looks attractive. On the other hand, for a risk-averse investor it is a good time to enter debt given that the interest rates are high and I think rates are likely to come off going ahead.
So there is not just the carry of high interest rates that you experience in debt funds but also for the longer-end bond funds, you may have mark-to-market (MTM) in capital appreciation as well. Hence, both the asset classes are quite attractively poised.
We spoke last in May 2013. How have things changed for HSBC AMC since then? Are you finding existence in India tougher given the overall market and economic condition?
As a fund house, HSBC AMC has had a good time since May 2013. We are expanding the India franchise. Just in terms of business growth, in the domestic business segment, we have been one of the fastest growing AMCs since January 2013.
We are comfortable with our distribution footprint and the nature of products we have. We already have a few products lying with the regulator for approval and we expect that it won’t be too long before we bring them to market.
What kind of products are these and why at a time when investors are wary of the markets? Would they find any takers?
Most of our funds are standalone in nature and do not dynamically allocate across asset classes. What we have asked for is an approval for is a product called Managed Solutions.
It is a fund-of-funds (FOF) offering that allocates the corpus based on the risk profile of an investor on a dynamic basis. Depending on whether the market is over-bought or over-sold, the allocation is adjusted accordingly. A similar product has been accepted in the West and I think it will get a good reception in India as well.
How is the institutional business coming along?
We have groomed this segment nearly 10-times in the last one year in terms of AUM (assets under management) and in terms of number of customers. We are very serious about this business since we offer liquidity and solutions to our corporate customers.
We were a little apprehensive about this business earlier because of the operating environment. However, with the changes in the regulatory environment, the results have been encouraging and this has given us the ability to push ahead with our plans in this segment. The advisory function entrusted to us globally from September 16 for all India related funds has also given us a lot of boost.
One-year return from the HSBC Equity scheme has not been too encouraging when compared to the S&P BSE Sensex and the CNX Nifty. Where do you think you have gone wrong and what are you now doing to attract flows into this?
Our model is always to buy good companies and this investment does well over time. We haven’t strayed from this philosophy. It is not necessary that long-term investments start showing returns in the short-run.
If there has been a gap in our fund’s performance, it could be a result of that. Constantly chopping and churning investment philosophy doesn’t help. One has to stick with one’s belief and investment approach. I am confident that our performance is on the right track.
On the other hand, HSBC’s Emerging Markets Fund (G) has done extremely well. Do you think that the returns could now be much lower given the road ahead for EMs? How are you positioning yourself as regards this fund now?
HSBC’s investment philosophy is consistent across geographies. When the markets tend to become over-bought, the chance of appreciation obviously reduces.
But even at that point in time because of the way we make investments and select companies / stocks that are attractively priced. I hope this philosophy will allow us to sustain the investment performance we have shown in the past.
