The Hindu Business Line : India, small but diversified emerging market

It is clear that the fundamentals of India are strong. There is a diversified industry here unlike many emerging markets that are focused in one specific industry. — MR GILLES GLICENSTEIN, CHAIRMAN AND CEO, BNP PARIBAS ASSET MANAGEMENT

MR GILLES GLICENSTEIN

BNP Paribas Asset Management (BNP PAM), which manages assets worth 285 billion euros and is better known for its strong presence in fixed income products, formally announced its entry into India in March, via a joint venture with Sundaram Asset Management. However, even before the finer aspects of the venture were detailed, the new partners went ahead and launched their first fund together, Parvest India, targeted at BNP PAM's international clients who seek exposure to Indian equities. Business Line caught up with Mr Gilles Glicenstein, Chairman and Chief Executive Officer of BNP Paribas Asset Management, to get his views on India and emerging markets. Mr Glicenstein joined BNP in 1994 from the Ministry of Finance of the French Republic, where he was a financial inspector and a treasury official.

Excerpts from the interview:

A recent survey by Merrill Lynch found 60 per cent of the fund managers to be pessimistic about the macro-economic fundamentals. Is BNP pessimistic as well?

The Merrill Lynch studies are good indicators of what people think or what people say they think. (But) It is difficult to say. Less optimistic does not mean pessimistic. There is a change. There are current fears in the market: Fear of inflation, tensions because of wars in the Middle East, terrorism... There is also the increase in interest rates and reducing liquidity in Japan, the US and Europe. So that makes the overall landscape less buoyant than in the past.

Having said that, the fundamentals, in our view, are good. Markets are not overvalued. There is still a high rate of growth in many countries. The financial situation of most corporates is good. This is unlike what we saw in the last financial crisis, where there were overvalued assets that just burst. We do not see as much risk as in the past. Therefore, we believe the market remains quite strong in the long run.

You are talking about the equity market in general...

(Yes). The equity market remains an attractive one. We would not recommend selling and taking profits on equity and getting back to cash. Probably, in the short term, there is a lot of fear. We see risk aversion growing very quickly and we see that lot of people are not moving. It is not because they do not want to, but because they just want to wait and see what happens. But whenever you get out of the market, and go into cash, it becomes very difficult to get back in, because the prices may be too high. So our advice is to remain invested in equity.

What would be your view on emerging markets, particularly India?

I am not as good a specialist in India as our partners. That's precisely why we have the partnership, because they can provide us a better view on the fundamentals than we have. I do not think I would have been a good investor in India. The market did not seem to grow very well between 1993 and 2003. Then it boomed.

It is clear that the fundamentals of India are strong. There is strong demand. There is a diversified industry hereunlike many emerging markets that are very focused in one specific industry, like Russia is with oil. There is a wide diversification from IT to manufacturing to consumption. So, that should make it more stable than other emerging markets.

Having said that, India is still a relatively small market in terms of size. So, it is vulnerable to liquidity flows. That is the main issue.

India accounts for about 20 per cent of your investment in emerging markets... correct?

We have launched a BRIC fund, because many of our investors are interested in emerging markets. Investors try to simplify or summarise ideas. They would say that basically Brazil and Russia will fuel growth in China and India and they will all benefit from globalisation that affects emerging markets. There is a link between Chinese or Indian growth and growth in Brazil or Russia. So, as a result, it could offer a better-diversified emerging market portfolio than a single market.

Out of the BRIC fund, we decided that India would account for 20 per cent... I do not know exactly why... it was probably a sophisticated calculation! But that did correspond with the view also on some aspects of the valuation of the market. It could change in the future, depending upon the cycle.

Do you now see any investor aversion towards emerging markets, BRIC?

No, there is still interest in the fundamentals. Clearly, the global market movements are affected by decisions on the interest rate. It affects the rate of growth in some countries such as the US. It affects the foreign exchange movements and it does affect the risk premium or risk aversion.

In the long run, I think these markets could still offer a lot of attraction in terms of opportunities. Therefore, I do not see a change in these flows. What could cause a change, rather than these interest rate hikes, would be the fear that the banking system is unhealthy, which was the case in the Asian crisis in 1997. So far, central bankers have paid a lot of attention to that aspect. I do not see this risk materialising for now.

Would you adopt a wait-and-watch approach before you launch more offshore funds that would invest in India?

No, I do not think so. We will promote these products to our clients because our clients decide ultimately what to do. It is always difficult to time the market. I remember, when I began in the asset management industry 10 years ago, emerging markets were considered as a whole. And they were functioning as a whole. Something that would happen in Brazil would affect something in, say, Indonesia, because many investors considered it a unique asset class.

Second, many investors had a very simple view on how to be in the emerging markets. They would simply say emerging markets are all about raw materials. So, if we are at the beginning of the growth cycle, we should be invested in the emerging markets, because there will be demand for raw materials. But, then, as soon as growth reaches developed countries, you should get out of them, because then these markets would begin to grow very fast. Many investors, seeing that growth, will become interested, as very often they like past performance against future performance. The wise investor would say that you should get out of emerging markets because there is not enough liquidity to sustain the higher growth.

Now, there is a total change in mindset. The reason being, first of all, emerging markets are no longer viewed as a single asset class. Investors make differences between China, India, Russia and even Thailand. As a matter of fact, even on credit risk, there is much more distinction made now between one country and another and people do not mix different situations as they did in the past. That's an interesting aspect because if there were problems occurring in India or China or Brazil, it does not mean that the others would be (affected).

Second, people no longer think that they should get in and out of emerging markets quickly. Everybody now understands that some corporates in India and China are becoming global market leaders. Therefore, they feel they should remain invested in them on a permanent basis. These are significant changes.

All in all, it is still the beginning of these changes. There is still a lot of room before the Indian market becomes big on a worldwide basis. But there is a lot of change in the mindset, which will probably be followed by changes in the assets.

What sort of products from BNP's basket do you think you can immediately introduce in the Indian market?

Well, there are regulatory and expertise aspects. We have a wide range of products — offshore funds, fixed income, alternative strategies, equity, ETFs (exchange traded funds). So we have a really large variety of expertise. We also have expertise in concepts such as socially responsible investment, which is gaining importance in markets elsewhere. All of our expertise is open to Sundaram, our partners. But structured products is one area in which we are interested in the future, because that will complement Sundaram's equity side with less risky products.

Has your presence in emerging markets been mostly limited to fixed income?

We consider expertise in emerging markets as a specific type of expertise, whether equity or fixed income. And we, totally with our partners, have about $20 billion of assets in emerging markets with partnerships in China, Korea, Turkey, Brazil, Argentina, Morocco, and India, obviously.

It really depends on the country. In Korea, for instance, when we entered our first joint venture in 1998, it was almost only fixed income. Since then, it has totally changed with much, much more equity. So, we sometimes see a shift from one asset class to another. India is more equity driven than other countries.

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