‘Foreign investors are concerned about valuations, not elections’
Mugunthan Siva of India Avenue Investment Management, on Australian investors’ perception of India
Mugunthan Siva, Managing Director of India Avenue Investment Management, an Australiabased investment advisor that enables investors in Australia and New Zealand to invest in Indian stock markets, was in India recently for a grassroots tour. We caught up with him to get a foreign investor’s perspective.
Indian stock markets are trading at one of the highest valuation premiums to other emerging markets. Is this justified?
India’s valuation relative to the rest of the emerging markets has always operated at a premium, sometimes a 100 per cent premium or, on certain occasions, over 100 per cent. There are obviously some points when the premium becomes very high. Today it is high no doubt, due to two factors. One, China, which is a big weight in the emerging markets index, is trading at a big discount not only due to growth issues that the economy is facing, but also concerns from global investors on the question of “Will I get my money back?”
Two, India offers macroeconomic stability, its market is much more transparent and earnings growth has been very robust. It has allowed global investors to participate in a confident manner. So, it makes sense that India’s valuation today is at the widest premium to the emerging market pack.
But whether this can be sustained is difficult to know. It is unlikely that it will stay this way. Either China will see some fresh investors return because if the stimulus works and the economy starts reviving, then investors will look to enter China at least as a tactical play. Their valuations will rise closer to India’s, though perhaps not match it. In that case, India could go through a time correction because valuations are a concern.
I think longer term the India story looks more attractive, but in the short term, investors will always try and secondguess valuations.
We have a large political event around the corner — the elections. During periods like this, do you typically take a cash call or hedge using short positions?
It depends on the event. In December, there was removal of concern about whether or not the BJP would win the elections. One never likes to say it’s a foregone conclusion, but it is now close to that; it’s only a matter of how much the majority may be. So, some of the risks that were there in November, are not present today. I think the risk is not so much around the election but more on valuations.
Foreign investors are feeling that election results are priced in and maybe now the risk is after the event.
Markets always buy the rumour and sell the fact. They may say, okay, we have now played the BJPiscomingback story and it’s time to take a pause.