Govt reforms have led to lower leakages, higher accountability: Haren Shah
While valuations of Indian firms may be expensive from a historical standpoint, the underlying annual sales growth of 7% to 10%, the prospects of double-digit earnings growth in future, and the stabilization of inflation and interest rates, coupled with the government’s reform agenda, are all positive long-term trends, and the issue should be looked at in a larger context, Haren Shah, managing director, head of investments, Taurus Wealth Advisors, said in an interview. “Sentiment is still positive for Indian market. As underlying companies continue to deliver excellent results, we can potentially see higher market levels,” he added. Edited excerpts:
When it comes to equites, from an investment standpoint, which are the sectors you recommend? Which sectors could see a trajectory of earnings and multiples in the coming years?
We are most positive on the consumer goods and services sectors due to rising disposable incomes. We like the banking sector after seeing government recapitalization of PSUs (public sector units) which will boost lending. Also, selectively we like oil and gas and materials sectors as we expect commodity prices to remain firm.
Sticking to equities, does valuation pose an immediate hurdle for investors. India is one of Asia’s most expensive markets and its dividend yield is the region’s lowest. So, are valuations running way ahead of fundamentals?
Valuations are expensive from a historical standpoint, but underlying sales growth is there at 7%-10% per annum. Last quarter has seen lower earnings growth. Longer term we expect double-digit earnings growth for the broader market. Interest rates and inflation have stabilized, which have historically been a bugbear for the industry. The government reform agenda has led to lower leakages in the system and higher accountability, which is a long-term positive trend. The market valuation needs to been seen in context of the government policy.
Can the markets continue to rally the way they have this year despite slowing economic growth, high valuations and lacklustre earnings growth?
Sentiment is still positive for the Indian markets. As underlying companies continue to deliver excellent results, we can potentially see higher market levels. The key risk we are watching is inflation.
What do you make of the initial public offering (IPO) frenzy in India?
A bullish equity market is normally a good time for companies looking to raise equity financing. Sometimes, valuations can get stretched as investors become too “euphoric” and IPOs become a quick win for issuers. We caution investors to remain disciplined and be very selective to go for quality IPOs only.
There has been a lot of coverage on India’s progress on the ease of doing business rankings. While the rankings may not be the sole determinant for attracting investment, do you think the improvement is likely to boost investor confidence?
In India’s case, ease of doing business is one of the many reforms being undertaken by the government to attract investments. Business confidence is improving and will continue as long as the perception remains that they remain committed to reforms. This is being reflected in the capital markets.
What’s behind the rise of Asia’s stock markets?
In the past few years, liquidity has been one of the major drivers for equity market performance. Recently, earning are beginning to improve along with more stable economic outlook. Reforms in China and India have also encouraged foreign investors to re-look at Asian equities where they had been relatively under-invested for quite a long time. The consensus view remains that these flows will continue into 2018.
Looking at equity markets from a global perspective, how attractive are Asian markets relatively speaking? What about specific segments?
Global equity markets have performed very well this year on expectations and confidence that the US economy will see improved growth on heels of a more pro-business political environment. So far, that confidence has filtered into business spending and consumer confidence. On the heels of this we are also experiencing a more positive sentiment globally. Asian markets currently are at all-time highs measured by MSCI, just like most developed markets. The big difference is that when you look at valuations, Asian equities are still, with the exception of a few, at levels not considered overvalued from a historical perspective. With developed markets showing improving economic trends, Asia should continue to show positive economic growth and as such improving earnings outlook. However, the key will be to buy the right sectors as the current equity cycle is at a mature stage.
Do you think that EM (emerging market) Asia is at the beginning of the ‘mid-cycle’ phase of a long-tailed recovery?
Asian EMs have performed well in line with global equity markets this past year. Key driver for this to continue will be how developed economies continue to grow and the continued momentum of reforms in the major emerging economies. The key for Asian EMs will depend on China as it navigates its economy through financial reforms without slowing the economy too dramatically. Valuations in Asian markets are currently close to their mid-range with PE (price-to-earnings) multiple on the higher end. However, average PB (price-to-book) ratio of 1.8X is still below levels of 3X where we have historically seen overvaluations. Overall, we are positive on EM markets; currently, China, Hong Kong look more attractive in North Asia while Indonesia and Thailand look well placed for a commodity rebound.
Do you think EMs will be able to withstand the shrinking of the balance sheet by the US Federal Reserve?
Historically, rising interest rates in the US, which is a signal of tighter liquidity, does have an impact on EMs as liquidity tends to revert to the US. Since this is a special case as this is a first time we are going to experience the shrinking of the Fed balance sheet, liquidity should get tighter and as such impact EM markets. However, since this has been well telegraphed to the markets, the adjustment should be felt more gradually. The offset to this is that the Fed will be mindful of how the US economy performs and will only continue to unwind the balance sheet if growth remains steady or accelerates.
How quickly do you believe central banks will up interest rates? And how will this affect equity markets in Asia?
Interest rates in Asia usually take leads from what happens in the US. The US Fed, based on consensus, is expected to hike rates in December and in 2018 a couple of more times. Historically, when US rates are hiked, liquidity tends to flow out; and Asian equities have underperformed. This time, however, as rates have stayed much lower for a long time and the rate hikes are to normalise the interest rate structure, markets may accept the rate hikes as a sign that economic activity is strong. This should help support Asian equities selective and not lead to a broad-based sell-off.
Will sustained and ongoing financial market rally globally ensure equities remain the largest asset class for family offices in the region?
The strong rally this year has made investors more cautious as valuations get stretched. Markets will correct at some point and we do feel that even as equity exposure will remain substantial, cash and fixed income asset classes will see increased allocations going forward.
In the West and in Europe, family offices are an important source of capital—limited partners—in private equity (PE) and venture capital (VC) firms. The larger ones have also begun doing co-investments and even competing for deals with PE. How is the scene in Asia? We had recent reports which said Asia now has more billionaires than US, and may soon also overtake the world’s largest billionaire market in terms of total billionaire wealth. What is your reading?
The first step to support the growth of multi-family offices in Asia requires the owners of capital to be willing to delegate the management of their wealth. At the moment, delegation of this control is not a priority. Secondly, the cost of setting up single family offices to host adequate intellectual capital that can make a meaningful impact in terms of advice and return is substantial and hasn’t seen a buy-in from families. The rise of billionaires in Asia is representative of the growth and expansion of the economies, the emerging consumption, the stupendous growth of China and India, consequent business opportunities for the Asean (Association of Southeast Asian Nations) region and so on. Growth of such wealth presages the eventual growth of multi and single family offices. Having said this, at the margin clients who are moving towards multi-family offices have had a good experience, as shown by client retention rates and... the growth of existing family offices. While there is business out there, however for family offices to be as mainstream as private banks will take time.
How have the investment strategies of family offices in this region changed over the last couple of years? Is it now about income generation and portfolio diversification?
Income generation is an important consideration for ultra high net-worth clients; however, portfolio diversification away from public markets has increased over the past two years. Private equity investment in operating or innovative business models has been possibly driven by the success of numerous unicorns in the West and now in Asia. However, there is no change in strategy as far as the high net worth clients are concerned. They continue to largely invest in public markets across the globe. Allocations to asset classes and geographies may change but overall focus on public markets has not diminished.
What is your take on crypto-currencies? Do they present investors with a viable alternative?
Taurus Family Office does not have an official view on crypto-currencies nor Blockchain assets. The debate about crypto-currencies and Blockchain assets like Bitcoin, Ethereum and Ripple, to mention a few, often comes down to a philosophical debate between the centralized debt based fiat currency nation state system versus the asset based Blockchain decentralized nature of crypto-currencies. Bank views on the subject have been also very divided, as some bank CEOs have opined about potential for overvaluation of Blockchain assets. Cypto-currency should be viewed as VC investing with its associated risks and rewards. Recently, the CME (Chicago Mercantile Exchange) announcement to introduce BTC (Bitcoin) Futures contracts could lead to more institutional acceptance.
What sectors are popular with regional family offices outside equities?
As equity markets have performed well this year, family offices have been scaling back their exposure and moving their clients to other asset classes. Fixed income is still popular, but increasingly cash is being increased as liquidity is being valued for potential corrections and opportunities that may arise. Real estate has typically been an outsized asset allocation for the high net worth individuals in Asia. This has not changed. However, at the margin, interest in technology has gained significant traction, given the headlines around the unicorns who continue to rewrite rules of business in many sectors, most prominently in retail at the moment. At this point, interest levels are higher towards innovation and technology but this does not necessarily equate in...absolute investment size terms.
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