Foreign investors are concerned about valuations, not the elections: Mugunthan Siva

Mugunthan Siva, Managing Director of India Avenue Investment Management, an Australia-based investment advisor that enables investors in Australia and New Zealand to invest in Indian stock markets, was in India recently for a grassroots tour. businessline caught up with him to get a foreign investor’s perspective.

India’s valuation relative to the rest of the emerging markets has always operated at a premium, sometimes a 100 per cent premium or, on certain occasions, over 100 per cent. There are obviously some points when the premium becomes very high. Today it is high no doubt, due to two factors. One, China, which is a big weight in the emerging markets index, is trading at a big discount not only due to growth issues that the economy is facing, but also concerns from global investors on the question of “Will I get my money back?”

Two, India offers macro-economic stability, its market is much more transparent and earnings growth has been very robust. It has allowed global investors to participate in a confident manner. So, it makes sense that India’s valuation today is at the widest premium to the emerging market pack.

But whether this can be sustained is difficult to know. It is unlikely that it will stay this way. Either China will see some fresh investors return because if the stimulus works and the economy starts reviving, then investors will look to enter China at least as a tactical play. Their valuations will rise closer to India’s, though perhaps not match it. In that case, India could go through a time correction because valuations are a concern. I think longer term the India story looks more attractive, but in the short term, investors will always try and second-guess valuations.

It depends on the event. In December, there was removal of concern about whether or not the BJP would win the elections. One never likes to say it’s a foregone conclusion, but it is now close to that; it’s only a matter of how much the majority may be. So, some of the risks that were there in November, are not present today. I think the risk is not so much around the election but more on valuations. Foreign investors are feeling that election results are priced in and maybe now the risk is after the event. Markets always buy the rumour and sell the fact. They may say, okay, we have now played the BJP-is-coming-back story and it’s time to take a pause.

There are two different things. One is the economy and earnings and the second is market investments, sentiment and valuations. When we meet companies, the message is quite clear. The business environment is good, companies have good balance sheets, debt isn’t high, cash flows are strong. So economic tailwinds are there, with government schemes such as PLIs helping industry. But valuations are a totally different story and that is perhaps where businesses are concerned. This environment is probably as good as most Indian companies have had in the last 15-20 years.

These were initiated post-Covid. Post-Covid, we were starting to see IT professionals earning much more money and IT services becoming more and more dominant from a global perspective. With increases in IT pay, we felt a second derivative of playing this would be through real estate. Real estate has gone through a massive down cycle. We felt this was a time when inventory would get cleared and real estate companies would start to see an upcycle. Earnings growth will continue for a few years, but some of the valuations already reflect this story.

Healthcare, again, had gone through a down cycle after 2015. Pricing was really squeezed and valuations had fallen. Our view was that Indian pharma could have an opportunity like Indian IT, say, 20-30 years ago. The dynamics of the industry were set to improve. This would be a favourable time for a lot of the Indian generic pharma players because US companies were weaker, they had more debt on their balance sheets and their hands would be squeezed when trying to raise capacity.

India is the number one region for FDA-approved plants outside of the US, so Indian firms were in a very good position to take advantage. That’s how we think when we set sector weights. We are not too concerned about going with the index. Our focus is to try and produce alpha.

I think what happens is people expect change to happen too fast. China-plus-one is happening, but it’s happening at a slow pace and we’ll have bumps along the road. If you look at Vietnam, the Philippines, Thailand, Bangladesh, India, they will all slowly increase their share in global manufacturing. No one can replace China because no one has the scale yet to produce at that level. But they will all win some market share. For India to go from 3 per cent of global manufacturing to 4-5 per cent is significant.

Yes, China’s de-stocking is having an impact on price in certain industries. But when dumping is complete, sectors such as specialty chemicals will again become attractive, particularly when everyone has deserted the trade.

If I go back seven years ago, we found it was difficult to tell the India story. Most people said that they would get their India exposure in their emerging market fund. But today, they are much more open to looking at India as a standalone investment.

You have a lot of SIP investors locally in India and retail participation rising. Foreign investors will also become more and more enamoured of India, so I think the flows towards Indian equities will be good over the next decade.

In this grassroots tour we run once a year, we bring investors, researchers and consultants to India. We bring them to show them how regulators and the central bank work. We showcase fund managers and advisors and what their capabilities are, so they know their money is being well looked after. We also visit some companies because we find a lot of people don’t understand the scale until they see it. Then they get that light bulb moment and say, ‘okay, this is a place I need to invest’.

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