‘India is Less Exposed to US Protectionist Policies’
The outlook for India is favourable given that it is less exposed to protectionist policies in the US and the impact from demonetisation is fading, said Gary Greenberg, head of emerging markets at the London-based Hermes Investment Management, which has £28.6 billion of assets under management. In an interview to Sanam Mirchandani, during his recent visit to Mumbai, Greenberg said he favours those companies in India which are focused on development and use of technology. Edited excerpts:
What is your assessment of the first four weeks of the Trump presidency? Although Trump has followed upon a lot of his campaign promises more than anybody thought, his followup has been through executive orders that have been hastily constructed and in some cases he has had to retrace his steps. Now that he is subject to the constraints of the US constitution, whether he will be able to implement the kind of radical changes that he promised in the campaign is not clear. His behaviour so far has been erratic and would also lead to concerns for EMs and other markets.
Is protectionism the new normal? We are seeing a retreat. We had 30-odd years of returns to capital outpacing returns to labour and there is a backlash now which could last for a good while where labour attempts to equalise. Having said that, the populists usually campaign on the left and govern from the right. It is unlikely that labour will benefit greatly and that capital will suffer much. EMs have held up quite well since Trump won. What are the risks at this point? Protectionism is one risk for EMs. Further swing to the right in European elections which would imply a break-up of the euro and is another risk that could unsettle the markets. EMs have a cyclical tailwind, which is helping them. If there are no major policy blunders, whether it be in the US or Europe, the outlook is decent for this year for EMs.
What is your outlook for the Indian market within the EM space? We are positive on India. Compared to other countries, India’s problems seem to be less severe than those at other places. India is less exposed to protectionist policies of the US than other countries. The impact from demonetisation is beginning to fade. The implementation of GST (Goods and Services Tax) is the next big event apart from the state elections.
Some economists have cut growth forecast for India after demonetisation. What is your take? Both demonetisation and GST could have short-term negative impact on economic growth, but in the long term, anything which makes the economy more formal is good for growth and standards of living. The takeaway I get from companies is that it is a slower world, and India is also slow. But ultimately India has a lot of drivers which are on track. As the banking recoveries are implemented and executed, little by little the economy should see growth.
THE TRUMP RALLY
How comfortable are you with Indian valuations? Indian markets are near lifetime highs, but earnings are growing as well. The valuation is more or less in line with its long-term average and therefore isn’t particularly expensive, nor is it particularly cheap.
What are the investment themes you are looking at in India? The development and use of technology is a powerful, long-term theme. We like some of the companies in India that are both developing and using technology. For example, Bharat Forge is using advanced manufacturing techniques. Banks, such as ICICI Bank and HDFC Bank, are using technology to become more streamlined and reach more people at lower costs. We have a play on infrastructure through Power Grid which has good prospects and is well-run. We have exposure to Motherson Sumi which is enjoying a cyclical recovery and continuation of strong gains in market share globally. We have a position in Hero Motorcycles, which is more of a cyclical play. It was hit by demonetisation, but should recover fully in 2017.
What is your take on RBI’s decision to move policy stance to neutral? It surprised the market a bit but it bolstered their (RBI’s) credibility quite a bit. It seems like a reasonable decision.
Some also say that the US markets have turned expensive after the Trump rally and that would benefit EMs... They are expensive but if tax cuts and repatriation of trillion-plus dollars become a reality, which will very likely go into buybacks, the markets can even get a little more expensive. It is more of a liquidity and policy-led rally rather than real demand. Nothing has really changed except the hope that he will wave a magic wand and make things better, which unfortunately is probably not going to happen.
Do you see any risk from China, which has a huge debt? They don’t seem to be going in the right direction in the long term. They are growing through adding more debt, but I don’t see the Chinese economy as being at risk of blowing up. They have a current account surplus, a lot of foreign exchange reserves, and they own the banks.