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Bullish on emerging markets

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Despite the short-term concerns stemming from the collapse in the US housing market, we remain positive on the prospects of emerging market stocks.

MR SANDESH KIRKIRE, CEO, KOTAK MAHINDRA AMC
MR SANDESH KIRKIRE, CEO, KOTAK MAHINDRA AMC

Aarati Krishnan

Indian fund houses are lining up a slew of products that allow domestic investors to invest in stocks overseas. This is even as the stock markets are swinging up and down in response to global factors. Business Line interacted with Mr Sandesh Kirkire, CEO of Kotak Mahindra AMC, to understand the rationale for such funds. He also answered specific queries on the structuring of the newly-launched Kotak Global Emerging Market Fund, which will invest much of its portfolio in emerging markets abroad.

Excerpts from the interview:

With Indian investors now allowed to invest directly in overseas investment options, why should anyone take the mutual fund route to overseas investing?

The individual investment ceiling for overseas mutual funds is over and above the statutory stipulation of $1,00,000.

The important thing here is that investment in an overseas mutual fund portfolio gives you exposure to various scrips across geographies and is not limited to a few stocks in select countries alone.

Also, it is important to emphasise that mutual funds, among other things, bring exhaustive analysis and professional portfolio management skills to the table. Direct overseas investments result in direct dollar-denominated currency risks along with country-specific risks for an individual investor.

This risk exposure is, to a large extent, hedged by fund managers of emerging equities funds. So I think an emerging market mutual fund is an advisable investment option for investors seeking exposure to overseas equities.

Recent weeks have seen a cooling off across emerging market stocks due to fears of a US slowdown. With continuing concerns about the US economy and a housing collapse there, what is the outlook for emerging market stocks?

Emerging markets remain an important destination for global capital flows, irrespective of the direction the market takes. This is abundantly verified by the historical performance of the free float MSCI emerging markets index.

Already, emerging markets account for 25 per cent of the global capitalisation and this is only expected to go up. So, despite the short-term concerns stemming from the collapse in the US housing market, we remain positive on the prospects of emerging market stocks.

In addition, the risk perception of global investors about these investment destinations has come down and investment in these markets is seen as a relatively safer option.

As emerging market equities have been rallying for over three years now, is this a good time to take exposures to emerging markets at all?

Certainly, I think we will see more and more of these emerging markets evolving. They will move away from the external sphere of economic influence and become self-sustaining on domestic demand.

There are fundamental reasons that suggest the performance we have seen in the last three years will continue to remain upbeat in the future as well.

Why does your fund have an emerging market focus? Wouldn’t a global fund that invests both across emerging and developed markets have a larger and more diversified investment universe?

The growth in developed markets has largely become saturated and their nominal (economic) growth rates remain in the 0.5 to 3 per cent range. In comparison, most emerging market economies are growing above 5.5 per cent and will continue to do so for a long time.

This growth rate is nearly 50 per cent higher than that of the developed markets. With emerging markets witnessing a burgeoning of domestic demand and industrial wage competitiveness remaining strong, there exists much room for growth and stock price appreciation.

Given this scenario, it makes more sense to provide investors the growth potential of emerging markets.

Though there is an associated currency risk with such a fund, we will mitigate that by investing in currencies that have moved in tandem with the Indian Rupee.

Why has Kotak singled out T Rowe Price’s emerging markets fund from among the various options available to play the emerging markets theme? Wouldn’t a fund-of-funds product, which has a portfolio of different emerging market funds and shifts between them dynamically based on performance, have been a superior option?

T Rowe Price is today one of the world’s leading mutual fund companies with a long and stellar history in the asset management business; it has assets worth $349 billion under management. T Rowe’s flagship scheme now has a track record of over 10 years and is well-recognised. We found that Kotak group and T Rowe Price share many similarities, in terms of investment philosophy, the commitment to in-house fundamental research and professionalism. A strategic fit was found possible and we grabbed it.

Rowe’s SICAV Global Emerging Market fund has a consistent performance track record. Over the years, the fund has skilfully invested and shifted across various economies, tapping into their potential.

For us, it was necessary that a dedicated and a professional management team manage the portfolio with measurable accountability. So it was easier to choose this fund.

(This article was published in the Business Line print edition dated August 5, 2007)
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