‘Risk-reward equation for market is challenging in short term’
As the economy enters the fifth phase of unlocking, the markets are preparing for Corporate India to unveil its financial performance for the second quarter of FY21. Singapore-based RITU ARORA, chief executive and chief investment officer for Asia at Allianz Investment Management, tells Puneet Wadhwa despite short-term challenges, India remains of the most attractive investment destinations in Asia and the broader emerging markets. Edited excerpts:
Is risk-reward still favourable for equities as an asset class?
Equity remains an attractive asset class for long-term wealth creation — more so in light of the abundant global liquidity and fiscal measures to support businesses. Given
India’s favourable demographics, long-term growth trajectory, high-quality corporates, and strong institutions, a long-term risk premium of about 4 per cent for equities versus Gsec is sustainable. This translates into double-digit returns over the long term. In the short term, though, the risk-reward equation for the market is a bit challenging. Some sectors seem to be discounting a rapid return to normal, while others seem to be on a long road to recovery. We see near-term risks caused by Covid-19 and geopolitics.
What has been your investment strategy since the March 2020 low?
Our investment strategy has been laserfocused on stress testing and consolidating our existing positions, as well as selectively focusing on opportunity niches, which have emerged during the Covid-19 crisis. Urgent and strong action by central banks this time around has meant the markets have stabilised quickly, but the flip side is that opportunity windows in some asset classes have been very narrow.
Which regions/markets appear investment-worthy from a 12-month perspective?
It is difficult to give a secular view of regions and markets. Given the Covid-19 and geopolitical challenges, we expect the recovery to be Kshaped. Parts of economies will do especially well in the new normal, and others will lag. As a vaccine emerges, there can be some sharp moves in sectors impacted most by Covid-19, such as travel, tourism, entertainment, and transport. Availability of a vaccine will also worry the capital markets about the possible withdrawal of the abundant liquidity and, in general, a reduction in policy support. Hence, reactions will be divergent and mixed.
Any risk one should be aware of ?
One has to be mindful of the fact that the extent of the permanent damage to economies is still not clear. And the damage is likely to increase exponentially as time passes by without a vaccine. Thus, portfolio position should be bottom-up and take into account such potential risks. A delayed US election process is a bigger risk for the global financial markets.
The markets testing March 2020 low will be an extreme scenario with low probability. This is because of three factors. First, governments have realised that social distancing and enhanced hygiene help slow spread. Hence, absolute shutdowns can be replaced with partial ones. Second, there are positive developments in vaccines, medicine, and symptomatic treatment. Finally, central banks have shown the ability and willingness to expand balance sheets and avoid any major credit events.
How does India appear as an investment destination among Asian and emerging markets (EMS)?
India is one of the most attractive investment destinations in Asia and broader EMS. India’s march towards being a $5-trillion economy continues, notwithstanding momentary setbacks. Favourable demographics mean India can sustain ‘higher growth for longer’. India is at an inflexion point and most economists believe this growth super-cycle will extend for over four decades. India is one of the most attractive investment destinations in Asia and EMS. I am not particularly concerned about the recovery in the stock market ahead of the economic recovery.
Sectors and themes that you expect to do well in the Indian context?
As a long-term investor, we like sectors aligned with this growth story, such as automobiles, consumption, banks, construction, and capital goods. In the current environment, we need to be careful with sectors like banking, where clarity is yet to emerge on moratorium impact, NPAS, etc.
INDIA IS A SECULAR GROWTH STORY AND WILL REMAIN AN ATTRACTIVE DESTINATION FOR FII INVESTMENT”
The road ahead for FII flows into Indian equities?
FII flows tend to be volatile and influenced by multiple factors. They can change direction quickly. I do not anticipate a major pickup in FII outflows from India in the next few months given abundant global liquidity chasing returns and diversification. India is a secular growth story and will remain an attractive destination for FII investment.
What are your plans for the Indian markets/india?
In the last couple of years, Allianz has made many investments in India’s infrastructure, private debt, private equity, and real estate. Our exposure to India across public and private markets now exceeds $3.5 billion. With banks traditionally not active in the space and NBFCS out of action, this is one area where we find a strong need of capital and, therefore, we have been ramping up our activities in the space.