“We might have a blip this year with various pressures but we are long term investors and we are still sticking to the tried and tested ways of investing. But we do have tough years, of course, not every year is a brilliant year. Within our dedicated India portfolio, stocks like Nykaa, Vijaya Diagnostics and MapMyIndia are nice complementary holdings to stalwarts like HDFC, Infosys, TCS and so on,” says Hugh Young, Chairman & MD, Aberdeen Asset Management Asia.
What is your view of the world? Has it changed a lot?
Yes, but a lot was changing even before the Ukrainian crisis blew up. But, of course, that has really thrown things into confusion. We were seeing tightening coming through, inflation coming through, possibility resulting in stagflation. Now with the Ukraine crisis, both soft and hard commodities prices are spiking further. There is far more pressure on inflation and arguably makes stagflation look pretty inevitable this year.
So it is going to be a tough year for markets. In a sense, I would say markets are still very resilient. Yes, they are down 10-15% or so this year which is never pleasant but I have been operating long in markets and seen market moves of 30-40% in very short spaces of time on arguably news, though not quite as bad as news we are getting out of Europe. But it does not look good.
Are you making a case that even though markets have adjusted, there is still a significant amount of downside left?
Yes, I would say if – and this is a million dollar if – events pan out really badly and which is a distinct possibility, markets do have the scope to fall further. That is a further, substantial fall of 15% or more is possible. We may look at the portfolios that we have and they are sitting 14 times earning as an aggregate for some of our Asian portfolios of which India is a decent chunk. It is about 15%. The companies, the balance sheets are strong.
We are assuming some form of earnings hit this year. It is bit early to predict how much that earning hit it is going to be but we have been shaving off our earnings estimates just as a matter of prudence but still looking at very reasonable value. Of course, we are talking about a very confusing macro environment and a geopolitical environment but so far we have not been very good at predicting.
What is the best way out to isolate your portfolio when you know that the storm has not gone and more downside cannot be ruled out? Is it about raising cash or investing differently?
No, for us it is very much sticking with the quality end of the market, sticking with the companies we know well. Of course, trying our best to avoid those which are a bit expensive with vulnerable earnings and there will be some sectors that will be worst affected by what is going on, particularly dependent on raw material cost, if it includes any of hard commodities that have seen dramatic price increases or indeed soft commodities. So there is going to be a squeeze on certain companies. It is more a matter of stock by stock.
We typically do not run vast amounts of cash because it is a component of our client’s portfolio and in a sense, it is their choice whether they buy our India fund or our emerging markets fund or whatever. We do our best to get returns within that universe but the really big cash decisions within our client’s own portfolios whether they be an institution or a retail investor.
Why is the FII selling in Indian stocks rather overwhelming? The numbers have run up to $16-17 billion and to put in context, these numbers are greater than what we saw when the world literally melted away in 2008?
Yes, a lot of that is risk aversion. Emerging market funds, which in the good old days were BRIC Funds and the R in the BRIC has disappeared from the market and it has gone to zero and that has caused a lot of investors to pull away. We have not actually seen huge redemptions in our emerging market funds or indeed in our dedicated Asian funds but, of course, others will have seen that happening and in certain markets it will be withdrawal of margin lending. But generally, there’s flight to safety and that is what we are seeing. It is not particular to India but that is why India is down, give or take in line with other markets.
It is good to hear that you are not getting redemption in the funds which you manage because you are not a top-down investor, you are bottom-up investor and you look at individual companies. So can I say that the selling is largely macro and ETF and country domicile funds which are selling not because they want to sell but they have a compulsion to sell?
Yes as far as I am aware. I mean I have not got the statistics in front of me but yes that is exactly what will be going on. People think we could be having another major pan-European war as an extreme but, of course, that extreme that we would have called a huge extreme three weeks ago is not nearly as extreme today as it was then. So, it is more of a possibility than it was. People are simply pulling back, looking to go to safety whatever that may be and that differs for many clients. So it might be gold, might be back into cash and the professional fund managers such as ourselves are simply reacting to that. Effectively, people are forced sellers.
Over the course of the next couple of days and weeks and months would you be looking at increasing your India exposure after the recent fall? Last time we interacted with your firm, the view was that India was an expensive market and China at the end of 2021 looked attractive?
Yes, for us it is how India looks relative to the other areas we invest in. With our dedicated India funds we of course have no options and we are looking within India but the bulk of our monies investing in India are either regional or part of global emerging markets funds. So we are very much looking at where India stands relative to other markets in terms of valuations. India for a while has been an expensive market relative to other markets particularly with China’s fall last year. So the relative outperformance of India was actually very high last year but of course that makes China a bit more attractive, although again in a distant realm of possibility, China and Russia are closer and there could be issues there from a geopolitical point of view.
We are not anticipating them but one never knows and so China is not without its dangers but as a market it looks a bit cheaper than India and arguably a bit more attractive. But many of my competitors too will have large exposure to China already. So if anything, you are seeing maybe a bit more interest in places like Southeast Asia, Malaysia and Indonesia which from a macro point of view stand to benefit a bit more from increasing commodity prices and have been neglected markets for quite a while because they are very small markets. So the emphasis first and foremost has been on China within the Asian region and secondarily India.
For the longest time you have bought into growth stocks at reasonable value and private banks, IT and consumer companies. Has that orientation changed given that everybody is of the view that growth will take a back seat and value make a comeback? That one should not focus on cash flow but on enterprise value and the PE multiple?
Yes, there is arguably a shift although if you look at our portfolios, we are still very much like the banking institutions. We have a large exposure to the twin HDFCs, the Kotaks of this world as indeed we have large holdings in Infosys and TCS and some of the consumer stocks such as the Lever operations. So we still like those.
Are we seeing a bit of a shift in markets? Some of it is what I could call the lower quality names which have been picking up in various markets; some are pure commodity names which have been moving quite strongly as well. So there is a bit of that coming in but we have not really shifted from our focus on quality growth because we think that will still come through strongly. We might have a blip this year with various pressures but we are long term investors and we are still sticking to the tried and tested ways of investing. But we do have tough years, of course, not every year is a brilliant year.
You have been a big fan of HDFC group of companies. Is there a concern about HDFC group of companies because those stocks – whether it is insurance or bank or HDFC Ltd – are getting smashed?
Yes, there was a worry even back in 2007 how long can it go on and how long can premium ratings go on? Will earnings pause and certainly we saw some very high prices coming through for HDFC. It is still one of our top holdings. We try and be clever from time to time, taking a bit off but still fundamentally, I would argue that it has very strong underlying businesses but I am afraid the share price would not go up every year. It needs a bit of a catch up with earnings and that happens from time to time within the growth areas. Certain stocks get a bit overvalued, earnings catch up, share price does nothing for a year or two and then hopefully we go on to the next stage of share price growth along with earnings.
If only it were sort of nice and steady and a nice 10-15% in earnings growth a year combined with the same in share price, but sadly markets do not work like that although that is precisely what they have done but there have been some very bumpy years in between and we might well be due for a bumpy year this year.
Your team identified the private banks to be way ahead of the curve for the better part of last decade. You have been holding on to private banks and that trade has worked like a charm for you. What is the multi-year trade or India investment for you? Where are you confident of a reasonable 15-20% earnings growth?
I still think we can get that from some of the private banks. We can get that from IT, some of the consumer plays looking certainly beyond this year which is a bit of a question mark until we see how far earnings will be affected by higher input costs. Some of the new companies coming into the market are quite exciting one can still see very strong earnings growth.
We have been so far very pleasantly surprised by the share price movement and so although arguably the share price movements are a bit ahead of some of the underlying earnings, stocks like Affle that we bought on the IPO have done extremely well. I would say over the last year or so, there has grown a far more dynamic market for new world companies which is good.
Have you looked at Zomato, PolicyBazaar or for that matter even Nykaa?
Yes, we have and we have a small holding in Nykaa. Sometimes, one has to take leaps of faith in terms of valuations but within a dedicated India portfolio, that is what we look for at those types of companies. They are quite attractive additions, We also hold Vijaya Diagnostics and some MapMyIndia as well which are nice complementary holdings to the stalwarts like HDFC, Infosys, TCS and so on.
If Hugh Young has to go on a holiday a long holiday and has to lock three or may be five stocks in India and not be worried about those businesses. which would be those ideas?
I do take my holidays I assure you. I am too old to be working seven days a week. It would have to be a very long holiday a three to five year holiday which I would look forward to.
I just put the balance as our portfolios is today, I would never pick two or three because you can almost guarantee that those will not be the top two or three looking ahead three years and we are always slightly surprised by which stocks do well and which stocks do not do so well. Sometimes their businesses grow faster than expected. So the fast growth that really surprise me could be coming from the likes of Affle, MapMyIndia smaller companies but they are inherently a bit more risky. So we would rather be conservative, well researched, balanced investors trying as best as possible to hedge our bets while still being fully invested in markets.
You are not selling India and that is a comfort because you are one of the biggest investors in India. When do you think the trend would reverse in terms of ETFs? When would FIIs who have been selling into India be tempted to come back into India?
It is very hard to say as that will be a global issue rather than India specific issue. If I could say, this people would come back and it is not really because of anything India has done that people have exited. It has been a global move out of markets and so when we get people coming back into markets, will India be top of the list? Not necessarily it is not first and foremost in everyone’s investment universe. But for dedicated emerging market investors or Asian investors, yes with China, it is top of the list. It is a matter of when global confidence comes back, which as we speak today is hard to see when that is going to happen given the changes we have seen over the last few weeks. Change can happen very dramatically but it is hard to see change dramatically improving in such a short pace of time, let us see.