‘Funds will soon flow back into emerging markets'

Emerging markets, including India, have corrected significantly from their highs, but that may not remain so for long. Mr Arindham Ghosh, CEO, Mirae Asset Global Investments (India), feels that it may only be a matter of time before funds begin to flow back into the emerging markets. In an interview with Business Line, he shares his insights on the growth potential of emerging markets. Having launched an India-China Consumption Fund, he also talks about the growth potential of the consumption sectors in the two countries.

Excerpts:

There's been a flight of capital from the emerging to developed markets. Do you think this is the right time for Indian investors to further increase their emerging market exposure?

Globally, we have seen funds flow back from emerging markets to developed markets. It has happened due to a build-up in risk aversion, largely because of the geopolitical escalation of tension that we've seen in West Asia and Gaza strip. But, more importantly, the pull back has been due to the kind of recovery from the bottom we have seen in the developed markets.

The US market obviously hit the bottom and has bounced back. But the clear belief and conviction (also of investors in that part of the world) is that it is only a temporary phenomenon.

It, therefore, is probably only a matter of time before we see funds flow back into the emerging markets. Primarily because everybody is sitting on overweight position on the US markets.

Going forward, rebalancing will begin, where allocation would happen to the emerging markets. Money has to chase growth. If you look at US or any other developed markets, while they may look good in percentage terms, it isn't as exciting in absolute terms. So this is only a temporary pullback.

But how big a threat would inflation be?

From the European debt crisis to the current fear of inflation in emerging markets that we have seen is probably due to the US belief that the right policy prescription for it is quantitative easing. They believe that by pumping in money, the country would come out of the recession or de-growth it has seen.

But what it has done is flooded the emerging markets with liquidity. This, in turn, has ramped up the prices. Obviously, at some stage, this began to bite into other assets. But having said that, inflation in emerging markets is also something we have to learn to live with.

Whenever countries move from a ‘developing' to ‘developed' status, there is going to be inflation. So, beyond a certain point, investors know that inflation is only being exported into emerging markets. Their focus, therefore, will be on growth. And in that, we can't have two superior growth economies than China and India.

Do Indian markets look attractive after the recent correction?

Indian markets have already corrected by over 18 per cent from the top. Stocks are available at good value. I think, at 15 times, we are valued well. While India has always commanded a bit of premium, I think that we have a real positive surprise on the fiscal deficit front.

At 4.6 per cent, foreign investors will soon start building on their weights on India.

My sense is that it is already kind of starting to change in terms of allocation of weights. We just have to give it some more time from an institutional investors' point of view.

How different are the consumption trends in India and China?

The per capita income in India has doubled in the last five years. The general belief is that the next doubling up will happen in far lesser a time. And when that happens, it would have a wider cascading effect across different sections of the society in terms of wealth creation.

We are already seeing some of that now, with savings rates, after many years, beginning to move up. People now have higher disposable income in hand. Over 60 per cent of the population is going into colleges and universities now. And when this 60 per cent gets into work force, they will drive consumption. India, therefore, is at an inflection point in the J-curve (in consumption).

China in contrast has a higher per capita income. For a vast section of their population, the consumption of basic goods and services has already happened. They are, therefore, now moving into the luxury segment.

Take the case of BMW, the ultimate luxury car in automobiles. China has sold more than 1.2 lakh units last year, while India, in comparison, is struggling at 6,500 units. Even in terms of household appliances, the multiple in terms of consumption is far higher in China.

What will also help the consumption theme in China is the favourable thrust from the Government. In their latest budget, the government has hiked the minimum wages by 15 per cent across-the-board and has promised to build six million dwelling units each year for the next five years for the weaker sections of society. So, consumption would be the country's next driver of growth for the next many years, as it is a structural and behavioural shift.

Considering this, there are many consumption-related stocks, which are today available at throwaway valuations in China. So, the possibility of generating a higher alpha is much more in this particular product.

How will your new fund play the consumption theme?

The fund's investment theme will not be confined to just the consumption sectors; it will extend to sectors such as telecom, financials, realty, healthcare, utility, media, auto, and so on.

Basically, the fund's investment universe would extend to all the sectors that touch either consumption or the consumer.

It would, therefore, allow the Indian investor to participate in the two fastest growing economies of the world, and within that to get into the very engine of growth, which is consumption.