Foreign institutional investors are surely worried about the market in the short run, but not overtly worried about the prospects in the long-run. That the markets are going through a difficult time and are expected to remain battling uncertainties for some time, seems to be the consensus at the India-Asia Investment Forum organised by the Institutional Investor, and co-hosted by Deutsche Bank. And these tough times, say experts, call for a change in stance and also a change in investment approach.
?The excesses that started in the late part of the last year, were simply unfathomable. And now that the markets have started to decouple, there will be some sense. And in this, there will always be independent companies that will be attractive for investments,? said Manish Singhal, chief investments officer (Asia, ex-Japan markets) with AllianceBernstein Ltd. Having a top-down approach to investing, which involves locating attractive sectors and then isolating companies in that sector might not be a smart investment strategy anymore. Rather, a bottom-up approach of isolating strong companies and then evaluating the environment for investing would be a strategy that could yield better results, reckon these investors. The need to panic, was clearly not seen by these fund managers.
On the extent of decoupling, the markets would still have a long way to go, and more corrections could be expected, was the overriding opinion. ?The markets seem to have decoupled, but the economies have not,? reckons Singhal. ?The extent of decoupling cannot be gauged to an exact extent, especially in the short-run. There are too many conflicting signals,? said Samir Aurora, fund manager, Helios Capital Management, based in Singapore. ?Philosophically, in the long run, India is a strong market?, avers Aurora. He believes the fact that the powers that run the Indian government are weak, is actually seen as a blessing. This means that the private sector will get a lot of impetus to participate in the India growth story and therefore Indian investors in equity would be rewarded.
When quizzed by Akash Prakash, director and CEO of Amansa Capital, at a panel discussion, on the concern of Indian markets being over-valued, Aurora replied that India would always have a better price earnings multiple than its peers in South East Asia. ?You would not be able to estimate the earnings of many companies for the next quarter in Taiwan and other parts of Asia. And in India, we could, with a five percent margin, correctly estimate FY09 earnings now. And this is a big deal,? adds Aurora. The confidence that Indian companies have strong operations and that their earnings is not as volatile as others stand in good stead and will continue to fetch Indian companies a better multiple, he added.
The Indian stock market, while witnessing greater volatility and swings, would remain an attractive destination for investors. ?While absolute performance might not be the parameter to look for, relative performance, that is India?s performance as compared to other markets, would continue to remain strong,? reckons Aurora. The fact that India?s current account deficit is around 2% of the GDP and that India has a strong balance of payments situation, will hold it in good stead.
However, there were strong concerns on the downside as well. The cost of conducting operations is expected to rise further. ?Global risk aversion has reworked the risk premium and one can expect a 200 to 300 basis points rise in the borrowing costs from overseas markets,? says Douglas Hodge, managing director PIMCO. And this could have long-term repercussions. Drawing attention to this fact, Singhal expressed concern on India?s long term competitiveness. China?s growth happened in the nineties when capital costs were low and India?s large expansion in infrastructure will take place when these costs have risen. ?This adds to the net-worth and thereby the pressure to service a higher net-worth,? reasons Singhal. ?Expect markets to stay this way till the end of the year and see a revival later on,? said AK Sridhar of UTI Mutual Fund while speaking with FE, at the event.
Overall, the need to have a robust interest rate derivatives market, as a signalling mechanism for the markets to gauge the extent of heating, would be required to be created to take the market to the next level, reckons Hodge. Earlier, Sebi chief CB Bhave had mentioned that the regulator had placed developing of exchange traded interet rate futures, on a priority, is being seen as a positive by the institutional investors.