Fidelity Pares Overweight Position in India Stocks Amid Slowdown
(Bloomberg) -- Fidelity International Ltd. pared its overweight position in Indian equities, offloading shares in what it called “low quality” companies as Asia’s third-largest economy braces for its first contraction in four decades.
The $480 billion asset manager made the change to its Asia ex-Japan equity funds as Indian firms suffer from a double whammy made up of the pandemic and “issues with the financial system,” said Medha Samant, the firm’s investment director. Fidelity boosted North Asia’s allocation on its quicker outbreak recovery, buying shares of sportswear companies in China and firms in Macau.
Economic activity in India came to a virtual standstill after its prime minister ordered a lockdown of more than two months, adding to the woes of a financial sector already dogged by a credit crisis. Earnings estimates for the S&P BSE Sensex Index for the next 12 months are down about 13% year to date.
The asset manager defines “low quality” companies as those with regulatory risk, capped profit margins and corporate governance issues such as the treatment of minority shareholders, Samant said. The firm has divested from a few companies in the financial sector.
To be clear, Fidelity is still overweight Indian equities because of companies with strong business models and market share gains trading at attractive valuations, Samant said. The fund is overweight financials, while neutral technology. It has increased holdings of private sector banks, insurance firms and large-cap IT service providers since the March selloff drove valuations of the benchmark stock index to 2009 lows.
A weakening rupee is adding to the allure of high-quality firms in the export-oriented IT sector, according to the Hong Kong-based executive. The currency has weakened about 6% versus the U.S. dollar this year.
Other managers such as ICICI Prudential Asset Management Co. are also cautiously optimistic. “If you have further waves of infection, equity markets could correct despite the valuations being attractive,” Chief Investment Officer Sankaran Naren said, recommending an equal allocation to debt.
The rupee’s plunge and expectations of record government borrowing have reduced the appeal of Indian debt this year, although optimists say the prospect of more interest-rate cuts is good for short- and medium-term bonds. Foreign investors have pumped about $4.5 billion into equities so far this quarter, while dumping a similar amount of bonds, according to data compiled by Bloomberg.
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