The Hindu Business Line : ‘Underweight on India due to valuation concerns’

Valuations are now looking better as they are below their five-year averages and he expects valuations to remain firm except for sectors that have a direct exposure to the US. According to him, the fact that emerging markets will lead the global economy will help attract inflows in the long-term. Excerpts from CNBC-TV18’s exclusive interview with Mr Jonathan Garner:

So far, emerging markets have been under pressure and there does not appear to be any visible signs of de-coupling. Do you expect more pain in emerging markets?

We are actually recommending clients to start to buy back emerging market equities today, to re-invest some of the cash that we had recommended raising in June and July. We have been concerned tactically about this contagion risk arising out of the problems in the US. We now have some significant weakness in emerging market equities. The peak to trough move of 18 per cent is the second largest correction in the current bull rally. I think people have somewhat short memories. There was a bigger correction than this in May and June of last year from which emerging markets recovered quite strongly.

Emerging markets do have a high-beta downside risk during these global risk- reduction episodes.

What is the case for increasing exposure to emerging markets? Are these more appealing price points? Is the relative performance from here on likely to be better or are such markets safer havens right now?

I will focus particularly on valuations; trailing price-earnings multiple is now below the five-year average (14.7 times trailing earnings at close of business yesterday on the MSCI EM Index).

The five-year range is 11 to 18 times. It was as high as 18 times in mid-July when we were downgrading equities.

The risk premium to US treasuries again is now cheap- the five-year average is about 480 basis points.

You are currently underweight on India. Have you seen enough to change that or revise that rating?

We have left that unchanged for this month. The main issue is relative valuations.

That said it is interesting that Indian markets have been reasonably defensive. I think most foreign fund managers are underweight; some of the data that we looked at are underweight India.

That’s actually been quite a good thing, certainly over the last four to six weeks. There is nothing in our model yet that would cause us to change that stance.

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