Last week, Baring Asset Management (Barings), the international investment management firm, launched the Baring India Fund, managed by Head of Indian Equities Ajay Argal. Below he talks about his investment outlook for the Fund.
Says Ajay: “Year-to-date, the Indian equity market has been one of the weaker in the emerging markets universe, but we believe that this period of relative underperformance has created an opportunity for nimble investors who are able to take advantage of this development. Share price valuations in the Indian market are now as low as they have been since late 2008 in twelve-month forward price/earnings, price/cashflow and price/book terms, both relative to history and relative to their emerging market peers. Almost 60% of the companies listed on the BSE 500 Index are trading below 2 in terms of P/B (price-to-book ratio) and the median P/B of the Index is just. 1.6.”
“Such an extreme valuation level might be justified if there was a fundamental problem with the Indian economy or the Indian market, but we see no evidence of that. Against a backdrop of sluggish growth across the developed world of perhaps 1.9% next year, the International Monetary Fund continues to predict that the Indian economy will grow by a robust 7.5% in 2012*. While inflation has until recently remained stubbornly high in spite of continued efforts to bring it lower, the latest data show signs of encouragement, with food price inflation dropping from double-digit levels to 9% in November, closer to the government’s target of 7%**. So we see very attractive valuations and a positive outlook for growth supporting the market going forward.”
In terms of his investment strategy, Ajay says: “There are a number of attractive opportunities in Health Care where firms generally have good cash flow and high earnings visibility. We believe the sector is also attractive from a bottom-up perspective, with India home to a number of world class pharmaceutical companies. Such firms not only enjoy a strong position in the domestic market, but are increasingly exploiting India’s cost advantage to expand into the US generics market, which offers huge growth potential.
“We are also positive on the investment case for Telecom Services. The sector has been hit hard in recent years as consumer-friendly regulations have pushed down prices and hit corporate earnings. However, we are encouraged that the Indian government is now planning to ease the regulatory burden on operators and allow some consolidation in the sector. This should positively impact upon earnings for some of the larger Telecom Services firms. The sector has lagged the rest of the market since the phase of fierce competition started around two-and-a-half years ago but we believe that the competitive dynamics have started to improve with rising prices in the last six months.
“In our view, Telecom Services firms should also benefit from the ongoing increase in mobile phone usage. Even compared to other emerging markets, India has huge growth potential in this area with just 60% of the population owning a mobile phone SIM card. This figure is forecast to rise to 75% just over the next four years***. In addition, the sector should also benefit from increasing telecom data usage following the launch of high speed 3G technology. China has already experienced tremendous growth in this area and India appears well placed to follow.
“While we recognise that wealth creation and the rise of the Indian consumer is a powerful long-term growth story, we are relatively cautious on the more immediate outlook for Consumer-related sectors. Consumer Staples has performed well relative to the rest of the market in recent months and we see limited upside potential at current valuations. Consumer Discretionary valuations also appear stretched although we are more constructive on the investment case here as the sector offers access to firms with strong cash flows and significant market share, with a history of delivering high returns on equity to investors. We are, however, mindful that the high interest rate environment is likely to act as a headwind for consumer spending and this could impact profit margins.
“As the largest weighting in the MSCI India benchmark, Financials will be a key focus for the Fund. We are relatively cautious on the short-term outlook – particularly for public sector banks – given that earnings will likely be hit by high interest rates and a general weakening in global growth. Asset quality issues have started to surface in non-mortgage retail loans and loans made to small and medium-sized enterprises, most notably in the state-owned banks. In this environment, our focus is on high quality banks which enjoy low funding costs, a low risk loan book and low levels of non-performing loans.”
|
