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Allianz’s MacDonald On What’s Turning Foreign Investors Cautious On India

Foreign investors are cautious over making further investments in India due to changes in policy and regulatory uncertainties, according to Allianz Global Investors’ Lucy Macdonald.

“There is hesitation in understanding on what is happening on the ground in India for both global investors and companies,” Macdonald, chief investment officer (global equities) at the investment company, which managed $621 billion as of end-September, told BloombergQuint in an interaction. “We have seen quite a lot of, not necessarily disastrous, but surprises operating in India such as Nestle, Vodafone, Adidas and more recently Amazon.”

The world’s largest online retailer faced a setback after the government barred private labels, exclusive deals and deep discounts on e-commerce sites. In case of Nestle, its instant noodles Maggi was taken off the shelves after a government referral laboratory found excess lead in the samples.

“For a global investor, the first thing is to understand the environment you are operating in,” Macdonald said. “And for companies that have had these experiences (regulatory changes) are clearly going to exhibit more caution in the way they invest.”

India–A Class Apart

Macdonald said India will not be treated as an emerging market but as a separate asset class over the next five years. “The whole concept of emerging markets is slightly old fashioned,” she said. “We think China as a separate asset class. India is going to be on a similar scale.”

The top line and medium-term growth potential will help India stand out among all global markets, MacDonald said.

Watch the video here:

Here are the edited excerpts from the conversation:

There is a higher probability of an environment that has lower returns and higher volatility. How do asset managers like you work in such as a scenario?

We focus on quality. We always want to invest in stocks which have got good balance sheets, history of good capital management, governance and ESG (environmental, social and governance) impact.

In the environment we are in, where returns are harder and volatility is higher, that quality focus is even more important. So we have already seen this particular style of quality beginning to outperform last year and will continue as we move through this more uncertain period.

The other factor we are really focussing on is a long-term one. It is technology and the impact of digitalisation across all sectors. Technology is no longer one sector of the stock market. Those who are able to harness technology either to increase sales or reduce costs, improve their productivity and fight off potential new competitors are those which we think are going to be good investments in the long term. At the moment there is a stark differentiation between winners with technology and losers. We want to invest in those winners and be on the right side of history and at the same time do some quality businesses well that have duration and sustainability of growth with them.

Due to continued focus on select business models, quality and balance sheet strength, will markets become even narrower and will investors be ready to pay a premium for consistently performing stocks like FAANG?

I think there will be potential for narrow leadership. In fact, leadership has been broader over the last few years. Indices have been driven by technology in particular. There have also been areas of consumer, healthcare, industrials which have done well, too. So as we go through the next few years, the balance sheet differentiation will be narrower on that basis. And, investors will be more choosy about the quality of the companies they are investing in. But there is still plenty of scope. For a global investor, there are thousands of companies out there to choose from and there are new ones growing up all the time.

And for a concentration of high conviction portfolios we run, there is no shortage of decent companies. The issue has been a lack of valuation opportunities over the last few years. But we are getting some more interesting valuations appearing now.

What is the big asset class call for 2019 and 2020, is it equities, debt or gold?

I do equities so I’m biased on that. I wouldn’t claim to be able to forecast what drives gold. So equities to me still makes sense to be taking some risk as you are getting the dividend yield and growth and as well as capital appreciation in the long term. You have a huge diverse pool of companies globally which gives you plenty of ability to diversify your risk at the same time.

How do you look at India?

Yes. It does offer interesting top line growth. There is no doubt that when you look around the world and see where there is growth opportunities in the medium term, India really stands out. The reform that is going through is clearly positive as far as global investor is concerned. I think where the hesitation is understanding on what is happening on ground. And, you can see it in for both global investors and companies who are operating in India.

We have seen quite a lot of, not necessarily disastrous, but surprises operating in India such as Nestle, Vodafone, Adidas and more recently Amazon who have had surprises in their operations on the ground. The big risk when you are investing is not understanding what it is you are investing in. So building your understanding before you invest is the most important thing and being able to monitor as you go along.

Are you saying these incidents have already created some bit of aversion in the minds Indian investors who are operating through an indirect route?

Yes. But sensible caution and not aversion. When you invest, you need to understand as much as possible about the environment you are operating in. And, that for the global investor is the first thing that you need to be able to think of. And, for companies that have had these experience are clearly going to exhibit more caution in the way they invest.

Will India as a $3-4-trillion economy be getting dedicated bets rather than being clubbed under the emerging markets as a group?

Yes. The whole concept of emerging markets is slightly old fashioned. We think China as a separate asset class. India is going to be on a similar scale. These countries are different from each other and the opportunities and companies are also different. And as an equity point of view, we look at the companies themselves which are world-beating wherever they happen to be and India certainly has the technology, healthcare and consumer companies which have got the ability to grow. So that is what we are going to be looking for rather than a top-down allocation. The real constructive of emerging markets is more to do with indices than actually active investing.