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China's yuan devaluation at a time when the US Federal Reserve is contemplating to raise interest rates later this year, has taken global financial markets by surprise. Nimesh Shah, managing director of ICICI Prudential AMC, tells Puneet Wadhwa despite the uncertainty, India remains an attractive investment destination among emerging markets. Edited excerpts:
Are the global markets getting excessively worried about the yuan's devaluation? What is the likely impact on emerging market equities?
In a widely discussed move, the Chinese currency has been depreciated by nearly three per cent in the past few days. There is an apprehension this might cascade into a significant depreciation of the currency, which can affect the prices of many goods as China is a manufacturing superpower. However, given the country's vast foreign exchange reserves and current account surplus, policy makers might be able to limit the currency movement to a narrow range. While the global markets are recovering from the aftermath of Greece crisis and China sell-off, they are likely to be volatile till the first interest rate increase in the US is digested.
What about Indian markets in this backdrop?
The global emerging economies of Brazil, Russia, China, South Africa, Indonesia and Turkey are grappling with a higher current account deficit (CAD), and lower commodity prices. This means their growth rates can stagger for some time, and so their outlook remains cautious. China's growth has been slowing and its stock market movements have seen a fair bit of volatility lately.
India, by contrast, has a much lower CAD that is projected to be one per cent or thereabouts. Lower commodity prices, especially oil, provides room to lower input costs for Indian companies and helps boost macro savings. Inflation is low and under RBI's (Reserve Bank of India's) target rates. No doubt that India remains a bright spot among emerging markets and, therefore, an attractive investment destination.
Is there any steam left in the mid-cap rally or are we nearing a bubble?
There might be a few opportunities in the mid-cap space, but if you are looking for undervalued stocks, there are more opportunities in the large-cap space. About six months ago, we had a similar view that large-cap stocks were quoting on the higher side. Since then, a few notable quality companies have corrected in the consumer, pharmaceutical and information technology sectors.
A point worth mentioning is while the market is up significantly from the levels where the bull-run in equities started in October 2013, we are still distant from the overvalued or bubble territory. Sure, equity valuations are above average, but only marginally above the mean.
Which sectors could be the next value creators?
In our opinion, sectors connected to the commodity space and public sector space across many industries are deep value at this point of time. However, for the next five years, export-oriented sectors and private banks could continue to deliver value.
Which themes do you expect to play well?
Over the next one year, we are bullish on the 'volatility' as a theme. We recommend defensive equity investing with products in the balanced advantage and dynamic asset allocation category as suitable ways to ride the volatility. These funds invest in equities when markets are cheap and book profits when markets are rising, thus limiting risk and aiming to provide good returns. Investor should consider investing in such funds with an aim to benefit out of volatility.
Will the yuan devaluation prompt RBI to cut rates ahead of the next policy review?
The low inflation numbers might prompt the Reserve Bank of India to cut policy rates ahead of the next policy review. However, in our opinion, the inter-meeting rate cut would also require RBI's confidence on the monsoon. The question of the rupee playing a spoilsport does not arise because unlike 2013, some level of depreciation is beneficial for the economy and the market, because all the competing countries have already devalued their currency.
Do you think that any slowdown in the pace of flows from foreign institutional investors (FIIs) and the retail segment could be bridged by the flows from the EPFO into the equity markets going ahead? How sustainable would this be given that the market movement historically has been driven by the FIIs?
While the flows from FIIs may or may not be sustainable, over the last one year domestic retail investors have been switching to financial assets on account of better prospects than physical assets like real estate and gold which has underperformed. The gradual economic recovery is likely to benefit both debt and equity markets. In fact, going ahead we are likely to see more investors switching into financial assets, especially equity related schemes.
You have completed 11 successful years in value investing. How did you go about introducing this theme and how successful have you been?
We have always believed that Value investing works well over the long-term and it is suitable in a growth market like India. When we launched ICICI Prudential Value Discovery Fund ten years back, there was a belief that in India, value investing won’t work. However, now people are willing to believe in value as a way of investing and we were one of the few people who believed in it at a time when nobody did.
Pramerica Mutual Fund has acquired the Indian asset management business of Deutsche Mutual Fund (India). What is the road ahead for the Indian mutual fund industry? Is more consolidation likely?
While we do not want to comment on any specific consolidation in the industry, we believe consolidation will keep happening. The opportunity in terms of scale is large. If one manages money well, one will get good fund flows. If one can prove that their funds have performed well, then market share will increase consistently.
