The Hindu Business Line : `Inflation not a key worry in the Indian market'

With the equity market trading at all-time highs, how do global fund managers view the Indian market? Mark Konyn, CEO of Allianz Global Investors, says that strong earnings have been driving the Indian market. While Allianz Global has pulled out some money from energy stocks and are underweight on pharma and petrochemicals, it is overweight on consumer goods. Mr Konyn says inflation is not a key worry in the Indian market, and that India continues to be high beta play. He does not see any outflow in the near future from the Indian market, as India has become a profiled market for international investors.

Excerpts from CNBC-TV18's interview with Mark Konyn:

How do you see India now? You have been maintaining that it's a slightly expensive market but it continues to hit new highs.

It certainly does. I think India continues to be a high beta play on global equity prices for international investors. We are seeing that they have maintained their enthusiasm.

Even though valuations continue to be at the top end of historical levels, the likelihood is that the market will continue to attract capital as the credit boom in India continues.

What is your sense of what is happening? Do you think this market is continuing its process of re-rating or is it the earnings push that is keeping the markets buoyant? I think there is no question that India has become much more of a profiled market for international investors. It remains to be seen if you are going to see the rug pulled out from under your feet.

The very strong economic growth you are seeing, the credit boom that has been put in place, plus the strong earnings, is re-driving this market forward at a time when international investors have an appetite for risk.

But we would, again, be cautious if the economic situation does deteriorate, which it could. We know the current account deficit is significant and that the maintenance of that deficit depends on international fund flows, which to some extent is a play on global growth. So we would see some outflow. That potential re-rating would thus disappear and you would see some of the foreign funds start to pull back. But we don't see that in the immediate future. The markets still have more to run.

What do you see fund managers doing at this point? Are they putting in more cash or booking profits?

If you take a step back and look at what mutual fund investors are doing, I think the individuals have pretty much played out their profit-taking scenario now and a lot of money has been sort of appeased or taken off the table. But I think institutions, globally, continue to allocate money to emerging markets, in general. One can see that by the emerging market bond spread. One can also look at the credit spreads in Europe, which are very tight. So there is an appetite for risk as investors, particularly institutional investors, are sort of chasing incremental returns globally. So that is really what is driving the money that's coming in.

You are still going to see strong fund flows coming through to emerging markets, in general, and particularly to India. Paradoxically, this is a time when perhaps investors are reassigning their portfolio weightings in respect of some of the more mature markets, in particular the US, where we are possibly at a turning point. And our sense is that emerging markets will benefit from that.

We have just finished with the earnings season. Is there any sector you have re-rated or increased exposure to because of the numbers reported?

We have pulled back a little bit from the energy and petrochemicals sector. This is largely on a fundamental view, where we see margins more compressed compared to where they were earlier. But, generally speaking, we are sort of overweight on the consumer place in India. We are underweight on pharma. Again, we are overweight on capital goods and underweight on energy and petrochemicals.

We have hit a nice little patch globally. Most markets have performed and are close to highs. Flows are okay for the last many weeks into emerging markets, interest rate fears have receded, crude has too. What could tip this balance and change things around in the next three months?

The key risk issue has really been global inflation. But we don't really see inflation as a worry as we move forward. There obviously is expectation now that, globally, growth is moderating. In the US, there seems to be an orderly sort of work, where growth is coming down slightly, and consumption and consumer confidence is easing.

All things being equal, there is a moderate slowdown in the US. Europe, or possibly Japan, will see global growth more or less maintained, which is basically good news for emerging markets. The risk, of course, is if the US does hit a sort of speed-bump and there is a more direct or abrupt slowdown. We could get some failure in this part of the world, maybe Japan may disappoint. It is on a knife-edge in terms of inflation versus deflation. Also, it is difficult to read Europe overall. Managing different components of the continent's economy is proving problematic and difficult to read. But, all things being equal, the growth should be maintained. The risk arises if it doesn't. One would then expect international investors to try and take some of the perceived risks off the table.

In terms of Indian exposure, we think that once that money reverses, that current money account will start to be exposed and could weaken the currency, driving up domestic inflation. That could start to really impact valuations, and that's when you get de-rating on the markets.

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