Mumbai: Foreign institutional investors, the main driver of the Indian stock market, took out $13 billion (Rs65,130 crore) in 2008. In the past few days, they have been buying more stocks than what they have been selling, but overall they have withdrawn $2 billion so far in 2009. However, their long-term view on India as a good investment destination still holds, according to Austin Forey, managing director and senior portfolio manager in charge of global emerging markets funds at JPMorgan Asset Management.
In an email interview, Forey, who has some $6 billion to invest in emerging markets including India, says one should not read too much into India’s widening fiscal deficits in these troubled times. Forey does not care much for sovereign ratings and says India compares favourably with other developing countries. Edited excerpts:
Price conscious: JPMorgan’s Austin Forey says that his company concentrates on individual companies rather than sectors.
The US stock market as well as many in the developing world are touching their lows of last November, while Bric (Brazil, Russia, India, China) countries haven’t slid that much. Why?
If you look at declines from the peak in late 2007, the sell-off in emerging markets including India has been just as severe, and compounded in many cases by weakening currencies. In recent months the fragile state of the developed world banking systems has probably been a significant factor. The emerging markets, with some exceptions in Eastern Europe especially, do not face the same solvency problems in their financial systems.
Is the relative stability of developing markets and particularly India sustainable?
I think this is a short-term effect; in the long run a stable political system, the rule of law, and an economy which allows market forces are the best guarantee of stability. In this respect, India has always compared favourably with many other developing countries.
Are you worried about the burgeoning fiscal deficit?
India cannot expand its fiscal deficit for ever, but a counter-cyclical expansion is a conventional economic measure which you are seeing all over the world at the moment.
Standard and Poor’s recently said that it may lower India’s sovereign rating to junk. What will be its implications on Indian companies, and the Indian markets?
I have never paid much attention to rating agencies as an equity investor. In general, the sovereign rating tends to set a ceiling on corporate debt ratings, but in practice equity markets look through this to appraise equity risk anyway. The real risk you face as a foreign investor in India is losing on the currency, but in the long run, the currency reflects the inflation differential against the West. Given that we take a long-term view of investments, the most important question is not about a company’s rating, but its ability to capture inflation in its business in the long term. If it can do this, sovereign risk is not necessarily a deterrent for us.
Why is gold rising in spite of a stronger dollar?
I think it indicates that while some people are afraid of eventual inflation as a result of the massive monetary stimulus being used, others are afraid of deflation and don’t want to take any counterparty risk.
People in the first camp buy gold as an inflation hedge; people in the second camp buy it because you can bury it in the garden.
Does China have the financial muscle power to bail out the rest of the world?
No. While the Chinese government has considerable fiscal flexibility, its reserve base derives from the same imbalance that created excess debt in the West. In the long term, China will need to rebalance its economy away from investment and exports and towards domestic consumption, but this will take a long time.
At the moment, the US government bond market remains more or less the only asset class which is large enough and liquid (enough) to accommodate China’s foreign exchange reserves.
What will happen if the big pension funds move their money out of India?
I have no strong view about this. In our experience, there is more of a barrier to entry, given registration requirements for foreign investors.
Some fund managers are talking of India being overweight in their portfolios.
We have always found India a market in which good investments were available; but our style is very long term, biased towards high-quality companies, and tends to look for really long-term growth.
For other fund managers, who may have completely different investment styles, other factors could lead them to very different conclusions, but I can’t offer any insights into others’ approaches.
Are fund managers—including you—talking of returning to India?
We did not leave India in the first place; it has always been a part of the developing world in which we have found investments that we like. Client interest in riskier asset classes such as emerging market equities is likely to take some time to recover. I can’t comment on possible amounts.
This year is being called the year of the stock picker. Do you agreewith this view?
Every year is the year of the stock picker, in my opinion. But it is certainly the case that in times of stress, companies’ competitive positioning brings the biggest payoff—that is when losers lose and strong companies really move forward. So, in this respect, I agree with the question.
Which sectors in India catch your fancy as a fund manager?
We really concentrate mostly on individual companies, rather than sectors; in the long run we do think about which sectors will outgrow the economy, and there is no reason to think that India will follow a very different path; but changes in market share are at least as important. Sectors which seem very immature are always interesting but we have to try to understand local factors which may explain this. And of course, we are very concerned about the price we pay; so equity valuations play an important part. We would not, for obvious reasons, telegraph our investment moves before we make them.