What is the strategy of HSBC AMC in global emerging markets Will the AMC try to replicate its global emerging market policy in India too
The return on equity is better in the developing markets after a long time as compared to the developed countries. Some of the changes witnessed in the emerging markets are the restructured balance sheets, better corporate governance etc. However, though the valuations are still higher in the developed countries as against the underdeveloped countries, the gap is narrowing. For all these reasons, we want to be an important player in the emerging markets.
In line with our top position in other emerging countries, we want to replicate a similar stance in India, and would like to be an important player in the asset management business. But the question is, how do we get there. Everything depends upon the opportunities. However, a good way to achieve size is to grow organically, but down the line, if there is an opportunity for sensible acquisitions we will obviously look at it. The growth through the inorganic mode depends upon the right opportunity at a right price and the required factors fitting properly to our requirements.
What are the areas HSBC Securities would like to bet upon Debt has done well in the last two years and equity market appears to be consolidating.
For a long-term horizon, equity is an interesting area to remain invested. If you start a business you have to dig in for a long term and this happens to be the policy of HSBC AMC. We are happy to put money in this country, we have also invested in those countries, where others thought it was a risky proposition. HSBC has been in India for the last 150 years.
As a whole, equity, as an asset class, offers better long-term and superior returns as compared to other instruments for investors and portfolio managers etc. If we talk about India, the factors that would weigh on the equity markets are; global uncertainty, usual political noises, and the Pakistan concern.
Normally it is seen that foreign institutional investors (FIIs) see emerging markets or the regional markets as a whole and sell across the board if they find a problem in any one of the regional or emerging markets. What is your opinion
It all depends upon the nature of the problem. If it is something specific to India then we have to assess the situation. In general, we look at the investment decision on the basis of fundamental value, global perspective -- political, micro economic situation of the country where we operate. It also depends on how the country positions itself to make itself attractive to get money from foreigners, transparency provided by the companies to investors etc.
If a country has a poor minority shareholder protection, weak supervision and poor corporate governance, then we might be forced to bid adieu to that country since our basic requirement is to take care of clients money.
What is your investment approach, keeping India in mind
We have a two-pronged approach. We have global sectoral allocation from a global perspective, where we determine the specific responsibility to come with asset allocation across the sectors. We have six sector-specific analysts sitting in London. For example, if we say we want to be slightly overweight on banks worldwide, then we will ask our banking specialist on the emerging markets to give the names of top 15 banking stocks in the emerging markets, worldwide.
Indian technology companies compete with Israeli or South Korean companies in terms of valuations or quality of technological assets etc. So when we want to buy technology companies in the emerging markets we look at these countries. The other pre-requisites is the quality of management. On top of that, we see to it that there is a right geographical diversification. We also look at political and micro-economic factors just to make sure that from the bottom-up perspective we do not get carried away. For example, if my team finds individual companies in Brazil very cheap at this movement and our whole team wants to buy them, I would say, there is a lot of political risk out there and take a cautious approach. The best example was Argentina, the companies over there prior to its bankruptcy looked very attractive, but overnight the scenario changed. Political and economic crisis in a country usually overshadows everything at the fundamental level. For these reasons, we say, we dont want to have big activities in those countries where the element of political risk is very high.
Is there any cap for investing in emerging markets
We do have a similar kind of rule, but not exactly the way you are talking about. In a country like South Korea, our investment is around 22 per cent of the global emerging market allocation. We like Korea and we are overweight in that country. We have made a distinction between small and large countries. In the case of Korea, in an extreme case, we can take our share to 33 per cent. But, to be honest, in practice we would not like to go that far. In India we would like to be around 4 to 5 per cent of the global emerging markets benchmark and can go up to a maximum of 8 per cent if we are bullish about what is taking place here.
Where does India stand in the emerging markets list
To give a balanced answer. In emerging markets, if we look at Indian companies, IT companies are well-managed, fairly secure, traded well, sharing the profit and are internationally competitive. IT companies offer a good opportunity for a long-term investor. In fact, we have increased our exposure in the software companies recently. The second group of companies that look attractive are the state-run companies.
Generally, Indian stock markets looks attractive and when we talk about governance, things are improving in terms of business friendliness etc. However, politically speaking, Indian government is making a relatively slow progress and we would like to see much more proactiveness like taking away protective barriers, more activity in terms of privatising state-run companies etc.
Internationally, the progress of privatisation does not look great. One day one minister talks about the privatisation and the second day some other minister talks something different. Overseas investors get jittery over such double-speak and indecision. All these imbalances have to be tackled. There is a lot of potential, but it has to be unlocked.
Currently, the India weightage in our global emerging markets index has slightly gone higher as against the benchmark limit of 4-5 per cent. We see India as a relatively defensive market given the quality of its companies and its stock markets. Indian equity markets is quiet independent and is relatively isolated from the global trend.
If you are nervous about the equity market internationally, then Indian market is the place were your money is relatively safer. However, if you feel that everything looks alright and signs of recovery is on the cards in global markets, then it is better to look at East Asian countries -- Korea, Taiwan etc. The tech stocks of these countries during the recovery phase will probably shoot up faster as compared to their peers in India. With the signs of recovery in US we have already booked some profits in India.
However, currently as compared to the developed markets, we are overweight in the emerging markets. The main reasons for this overweightage towards emerging markets are -- underlying growth of companies in emerging markets both in the form of GDP and the economic growth. There are also a lot of individual companies which are better as compared to similar companies in the US or European Union.
Presently, in our chart for emerging markets Indian doesnt figure in the top 10 countries. Our India investments are in -- software, pharmaceutical, financial sector - State Bank of India and in petrochemical major -- Reliance Industries etc.