Regional head of investment management for Prudential Asset Management HK LtdGuy Strapp oversees £32.8 billion (Rs2.7 trillion) worth of assets across eight nations, including India. Strapp, who joined the group in January 2007, is tracking Indian markets for first time. The Indian company contributes 20% to the overall assets managed by Prudential Plc. In India, Prudential partners with ICICI Bank and has a 49% stake in ICICI Prudential Mutual Fund, the second largest asset management firm in the market. In an interview with Mint, Strapp spoke on this month’s hottest subject: the way ahead for global markets. Edited excerpts:
How much exposure does your firm have to subprime loans?
We don’t have any direct exposure to these loans. We do hold credit default swap exposure in some funds. But they are top-rated instruments. My view is that unless there is a massive contagion in terms of where this issue stretches, we are absolutely fine.
How do you think Asia will be affected by the subprime debacle?
It depends how far the effect rolls. We could see the impact at two levels. One could be that Asia has its own subprime problems. At present, there are no signs of very large below-investment grade lending for housing. If in the US or elsewhere in Europe, the subprime problem falls into real economy then it becomes a concern, because it can potentially put brakes on the growth of the economy and will have a detrimental effect on Asia.
The issue of subprime loans was first talked about in last October or November. And we are talking about it now also. It’s probably going to be the topic of discussion even next year. That doesn’t mean it will get better or worse. It’s just that we won’t know the impact until we know that people are forced to refinance their mortgages, which are taken at cheaper rates for first few years and are renegotiated upwards in later years. If these people are not able to refinance, we really can’t understand the impact of this whole issue.
So the worst isn’t over yet?
It’s difficult to quantify the impact as all we know as of now is the general comments about some corporates having exposure to subprime loans, but we don’t know the extent of the same.
Will it affect the credit and bond markets in Asia?
It certainly had a short impact and we need to ask whether it’s sustainable. We did see the credit spreads in US contracting for first time in six months. We need to understand that the fundamental story is very strong. Economies are intact. Except for a small sector of the global economy, the recent jolt doesn’t seem to have derailed the current trajectory of economic growth and corporate profitability.
You mentioned in your presentation that Indian market trades at a multiple of 20 times, which is the highest among other countries such as Taiwan, Indonesia, Thailand and Malaysia. Still you hold a neutral position?
We have lifted our exposure to Indian markets. It’s trading on higher multiples. But that’s just a starting point for analysis. But you need to look at the quality of the underlying story. China is also trading at a similar multiple. But we think there are potential risk factors evident in China. India’s inflation looks okay, but China is having trouble in getting at the top of inflation. China would have greater exposure to global slowdown whereas India is more protected.
The past few weeks’ events in global markets suggest that emerging markets are still prone to what happens globally.
Emerging markets have always traded at a hefty discount due to liquidity or other factors. The de-coupling (from the US economy) I am looking at could suggest that emerging markets could trade at a par or at a premium with the developed markets. If variations between the growth, and sustainability of growth between emerging markets and developed markets start widening, then potentially we may see the de-coupling in future. For instance, if China and India show a propensity for higher growth in future, then it would be sustainable to invest in these countries at higher multiples.