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India's domestic story will keep investors coming: Ashburton
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India's domestic story will keep investors coming: Ashburton


Speaking to CNBC-TV, Jonathan Schiessl of Ashburton says foreign investors will be drawn to the Indian domestic story. "It doesn't matter what happens in the US or elsewhere," he said.Investors are taking note of India, given how there has been economic and earnings recovery. High double-digit growth will catch the attention of people, he said.While talking about specific stocks, he said his bets on Tata Motors have paid off over the years. In the financial space, India is doing much better than China as both RBI and the government have taken steps to deal with the non-performing asset issue. "China is hiding their NPL (non-performing loan) issue," he said.There are still issues in the public sector space, but for private sector it is good news. It will take some time before the bad loan problems go away, he says.Industrials are a long-term bet as they are a secular growth story, he says. Among non-banking finance companies, he is upbeat on Capital First .Infosys and Eicher Motors have been good performers. Particularly, in Eicher, he feels, the export side of the business is interesting. He says he will stay invested in Tube Investment . Although HDFC hasn't done well, he has topped up his positions in the mortgage lender. Below is the verbatim transcript of Jonathan Schiessl’s interview with CNBC-TV18's Anuj Singhal and Sonia Shenoy.Anuj: We have seen that quite a bit of decline in European markets for last 3-4 days. Do you think this Brexit worry is now getting too big and do you see this as catalyst of next round of correction?A: Certainly clearly Brexit is at the forefront of most of us in the short term. Obviously there is Spanish elections coming up as well. So it is not just the UK which is worrying, particularly the European investors, it is the broader implication of Brexit and what is going on in Spain as well.Sonia: You manage the Ashburton India Equity Fund as well. I wanted your thoughts on what the view is on India now from the Foreign Institutional Investors (FII) community because we have suddenly seen an inflow of money coming into India perhaps because the domestic macros are improving, earnings are looking good but what is the sense you are getting here on?A: It is interesting. The last year and half the Indian market has been frankly quite a disappointment for foreign investors. The way we have been telling our investors certainly is that it is broader emerging market (EM) concerns that have been hampering the Indian stock market as well as the earnings issues that we have been having since some time be it banking sector related or commodity complex related. So, now there has been a perceptible shift. Clearly India lagged in the first few months of the year as some of the other EMs rode up. But India has now caught up and for us it is an appreciation that we are seeing slowly more on the ground signs of recovery within the economy, but more importantly from an equity investor perspective we are also seeing for the first time in many quarters some companies coming out with some decent numbers.Anuj: In your India fund one of the large holdings is Tata Motors and that stock has done remarkably well for you over the last six months or so. Do you think this whole global correction could have its impact on Tata Motors or are you quite okay with the stock even at current levels?A: Yes, we have held this through some pretty volatile times. Few months back when everybody was worrying about China Tata Motors really took it on the chin. We held it through that and actually we added into that. For us the story - if I look at Brexit and if Brexit actually happens then clearly the pound is going to suffer a bit in the short term and that should benefit ultimately the Jaguar Land Rover business.But broadly speaking we are really comfortable with the product line up that that company has and as long as we don't think - which we don't - that the global economy is going to crash any time soon then this structural shift sort of playing in towards Tata Motors' and Jaguar Land Rover's product cycle for us means we are still very attracted to the stock.Sonia: The other space that you are into is the financial space. One of your largest holdings is in names like HDFC and in Axis Bank as well. I don't know if you have been tracking the various norms that the Reserve Bank of India (RBI) has come out with in order to deal with the stressed asset situation. Do you think that we are nearing perhaps somewhere near the end of the non-performing asset (NPA) cycle or do you think that things could get worse?A: I am not going to give you a Winston Churchill quote about the beginning of the end or the end of the beginning but yes, clearly the cycle has got a bit further to go but certainly looking from outside when you compare India to markets like China where they are hiding the whole non-performing loan (NPL) issue there is still a lot of uncertainty around that. A lot of investors take comfort from the fact that both the government and the RBI is trying to deal with it and the news out late yesterday is a slight positive for the sector. It is slightly more pragmatic reaction from the RBI that is sort of our read. But ultimately Indian banks are getting the grips with it. There are still issues ahead particularly for the public sector undertaking (PSU) space but sort of private sector banks and the wholesale banks this is further good news and ultimately the problem is being recognised and dealt with. But of course it will take some time longer before it is actually finished.Anuj: The other point that I wanted to discuss with you was that you are quite a bit of overweight on industrials in your India fund and industrials have done well over the last few months. Do you reckon there is more money to be made in this space?A: Yes, we try not to be too short term. So, ultimately we have been overweight industrials. So, the best part of three years? That has worked most of the time, but there are periods where it has come back and hurt us. But ultimately the stocks that we have got are exposed to secular growth stories and we are very comfortable again playing the slightly medium to longer term view on these names. And in the short term sometimes valuations probably reach fair value but ultimately most of the investors in our fund do take a slightly longer term view and these are secular growth stories that we ultimately want to be in. Of course as I said these from time to time these things reach fair value but ultimately on a longer term basis we still want to be exposed to some of these names.Sonia: One of the hottest spaces to be in these days is the NBFC space and I noticed that you have Capital First in both your funds. Something that you didn't have the last time we spoke. Do you see a lot of potential in the NBFCs or some of the micro finances or the lenders?A: Yes, we have interacted with the senior management of that company for quite some time. Very impressed with the systems that they employ and the overall how they view and how they lend and for us very nimble player by Capital First they are accessing segments of the market which the banks are not anywhere near. So, again from a portfolio perspective we do have banking exposure but it is also good to have exposure to other segments of the economy where we do see that structural growth coming through one which is underserved by most of the larger universal banks. So, absolutely that is a big role of NBFCs in the portfolio.Anuj: Two stocks which have done really well for you over the last 3-5 years have been Infosys and Eicher Motors but do you get a sense that valuation wise these stocks have now become bit too expensive?A: Yes, it is interesting the streets worrying a little bit, particularly about Eicher Motors, we have had it for many years as you rightly say. For us the stock has done well. It is looking a bit pricey in the short term. For us the street is probably underestimating the potential of the export side of the business over the next 2-4 years. So, again whilst waiting lists have certainly come down in the domestic segment for the motorcycle business. We do think taking a slightly longer term view there is still a massive market opportunity in other EMs and market segments that are very poorly served or even non-existent. So, the export side of the business remains an interesting story but one hasn't really started. So, we are prepared to ride through periods of fair value or even overvalued in names where we have a lot of faith in the long term strategy.Sonia: You just mentioned how you interacted with the management of capital first and you are quite impressed with them. Another very impressive and best in class management if you would want to call it is the Murugappa Group. And one of the stocks that you hold is Tube Investments which has been doing really well over the past many years. But now do you think valuations are catching up or would you still see a lot of value in names like these?A: We still see a lot of value there. Obviously, that is a mixture of financial services and a actual engineering businesses. So, the value that we see is certainly coming to on the engineering side at the moment. Clearly we have had some divestments in the insurance business which is being very value accretive for the parent, for tube investments as such. But we think with the recovery in the economy, actually the engineering business is going to start kicking in here. And even the cycle business which has been very steady certainly will benefit from an up ticking consumer confidence and actually the broader economic recovery. So, the more traditional side of the business is going to step up to the plate here which is why we are very comfortable to remain holding that particular counter.Anuj: Surprisingly, one blue chips stock which has not done well is HDFC and valuation wise, it is now cheaper than its recent averages. Do you get temptation to add more, use some of the cash that you have to add more to this stock?A: That is a very valid point, and actually we just more very recently have topped up our positions in that particular name on the exact point that you make that we are at global financial crisis valuation levels. Clearly, there are some concerns out there in the market, but for us at these valuations with the underlying structural story that we still think is out there for most of the businesses segments and in combination with a phenomenal management team. We are happy with that counter and as I said, we have been topping it up.Sonia: You did mention that the Indian market has not done as well as some would have expected it to do over the past 1-1.5 years. What do you see as the way forward for India? Do you see a lot more returns for investors from now over the next 6-12 months?A: We are fairly positive. The domestic side of the equation, if you like is finally beginning to come through. We think international investors will start to register hopefully, the earnings recovery that we are seeing, they heard a lot of this hype about the Modi government and reform and then there was an issue with deliver in the very short-term. But now that this economic recovery is gradually and it is still gradually broadening out and we are seeing an earnings recovery, people will take more note of India. And ultimately, the double digit, I am not sure what the latest consensus numbers are for next year’s earnings, but high double digit growth will catch the attention of international investors quite frankly in a growth cycle and particularly when you consider now that German ten year government bonds have gone negative yield.So the growth will attract people’s attention and ultimately, that should drive in a pretty decent returns going forward.Anuj: Do you think the Indian market is sort of ignoring the global headwinds? We have seen a big rally in Indian markets over the last two or three months and from the top, we have not seen too much of a correction. Would you want to see some correction to make this market healthy or do you think the market should continue to outperform?A: It has had a period of underperformance and the last couple of months are playing catch up, what I would really consider catch up and then some pricing in of that earnings recovery as well as some movement on the political front our reform perspective. Yes, we are in the strange period globally. Obviously, there is a lot of risk out there. So, with no doubt, India would certainly in a global risk off scenario be hit, but underlying yes, the valuations do not look broadly speaking too expensive to us for India, for where we are in the cycle. And therefore, whilst there could be volatility out there that comes from external factors. India ultimately, why the foreign investors, for example, it is the domestic story. They do not buy India for exports, they buy it because of that domestic growth story. And ultimately, it does not really matter what goes on in the US or Europe. That domestic story is very stable and attractive for overseas investors and that story will not disappear anytime soon.


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