After the European Central Bank’s (ECB) extension of quantitative easing (QE), all eyes are on the US Fed. Speaking to Bloomberg TV India, Aberdeen Asset Management Asia Managing Director Hugh Young says a Fed rate hike will provide much relief to investors. While the outlook for the next 12 months for emerging markets is pretty mixed, India can grow 8-9 per cent with faster reforms, he says.
When we are tracking a lot of global development, especially in the light of what the ECB said last week, what do you make of all the cues panning out? What are your expectations with regard to the FOMC (Federal Open Market Committee) and how is all of this likely to play out in the emerging markets?
We are all central bank gazing — so we are looking at the ECB, the Fed, and expecting a rise in Fed rates before the end of the year.
In some way that would be a relief to people because we have been waiting so long for rates to go up. It is still a question of how much of that is already in the market, because as we all know we have seen quite substantial weakness across emerging markets worldwide, weakness in macro indices, and weakness in currencies as compared to the US dollar, which has remained remarkably strong.
We have seen quite large outflows of institutional money from these emerging markets and they have pretty much flat on their back. The outlook for the next 12 months for emerging markets is pretty mixed.
Not all emerging markets are the same. Some places are doing well. India, for example, is growing at a decently strong rate but, of course, places like Brazil are having issues. China is clearly slowing and has been doing so for three years.
How much more volatility do you see, particularly post the Fed move? Do you feel markets have factored it in mostly or do you feel we can still see a knee-jerk reaction?
It is always hard to tell. Logic would say that there might be a bit of a knee-jerk reaction. You would have thought everyone is expecting it so it would be factored in. But the joy or the nightmare of markets is of course that they inevitably surprise you on the given day. But on that day the volatility can be very huge.
There are a lot of nervous people out there. So I would expect the volatility and I would expect it to continue later as well.
Expectations today are for rate rises. Nobody is bullish about emerging markets worldwide. People are worried about emerging markets slowing. So in that sense it makes me more positive as more people are worried and despaired about markets. That is when long-terms investors get excited and certainly valuations of the emerging markets are towards the low end. But, to be fair, there is not that huge an amount of turmoil as we saw 5-10 years ago.
Aberdeen has been one of the large investors when it comes to the Indian market. What has been your strategy when you talk about the Indian markets right now?
We have been optimistic for a long time about India. We have had sizeable exposures of our portfolios into India, which has done us proud. We continue to overweight India and pretty much the same, Indian companies.
Many of the companies that we are in today are the ones we were in 10 years ago, whether it be the IT services or some private banks, some consumer stocks or pharmaceuticals.
So the enthusiasm for India remains undimmed. India has some of the best companies in the universe of global emerging markets. As you correctly say, we have seen quite substantial outflow. Unfortunately, we have to sell when people redeem from us but it does not mean that we are less comfortable with India or its holdings.
But of course we have to reduce the investment as money comes out. We are the forced sellers when there is outflow.
If things start to somewhat stabilise, would you be keen to increase your position as far as the Indian markets are concerned? Would you like to probably pick up some stocks? Are the valuations looking attractive out there when we talk about the Indian markets? If you would like to invest, if you had the bandwidth, will you go ahead and buy the Indian market?
I think we are comfortable with the percentage exposure where it is today. We are still overweight on India. We have some reservations.
It is not about the quality of companies. The quality of companies is high as far as we are concerned. Our concern is still with India.
Valuations in India do not look particularly cheap at these levels. So India does remain one of the expensive markets in which we invest but one of the highest quality market as far as the underline companies are concerned.
What is the kind of pace of growth that you would be comfortable with? When it comes to India and China specifically, what is the kind of pace that you would be looking at next year?
It is always hard to tell the pace of growth with any market. Guessing the real rates of economic growth, the projected growth for both countries is give or take 6-7 per cent, which is good.
And it looks India might edge ahead of China in the next calendar year. China is certainly slowing; I think one has to treat it with a fair degree of caution. The reality is the Chinese economy has slowed quite dramatically over the last three years. It is not a new phenomenon.
China has been slowing for some time now. One can guess what the real rate is — whether it is 3-4 per cent. But China’s trajectory is a lot slower, which I think is not a healthy thing. It is not very healthy for economies to grow year after year at 10 per cent — that causes issues as well.
Hopefully, India is capable of 8-9 per cent growth but I doubt it will achieve that. It needs a lot of things in its favour like reforms to make this growth achievable.
What would work as an investment trigger for India? Would it be the key reforms, earnings revival or restructure of companies under debt?
We want all of these, I suppose. We are realistic enough to know that it is not necessary that all of this will occur. Certainly, sorting out the positions of some of the banks and debt within the systems are very important.
There are some issues which are restraining the economy. Then of course reforms, things like GST, would be a big plus. And allowing competition in the market.
So the opening of markets to overseas competition would all be very healthy. So these are the things we are looking for. Whether they happen in the next 12 months, I doubt very much. Life isn’t so simple. But with progress on as many fronts as possible, India can achieve some dramatic growth rates and it will be good for the population.
About the sectors we should watch out for, we are seeing the auto pack getting a little active. Have you also made that switch from avoiding the staples to moving to more of the consumption space like the auto sector and two-wheelers?
It is not something we will switch between. We have exposure to both. We have exposure to two-wheelers like Hero. We have exposure through the likes of Bosch. We still have our exposure through the likes of Hindustan Lever and Godrej. So our position fundamentally has not much changed because every time one bit of the market is doing better than the other bit. But we do not trade on that basis. Our holdings are far more long-term than that.
Give us a sense of what do you quite overweight on currently. Take us through what would still be the top companies that you continue to like?
Our top companies are HDFC, Godrej, Hindustan Unilever, some of the pharmaceuticals companies as well, the IT services familiar names like TCS and Infosys.
Not much has changed there.