India Will Catch Up With Emerging Market Peers, Says Enam’s Sridhar Sivaram
India has fallen even as most emerging markets have rallied this year. But Sridhar Sivaram is optimistic that domestic equities will catch up.
“Global growth numbers are baked in,” the chief investment officer at Enam Holdings Pvt. Ltd. told BloombergQuint in an interview. And for India to outperform, it doesn’t need others to underperform, he said, adding that as long as there is no global crisis, the local markets will do well.
Sivaram also said that foreign investors won’t move to China at India’s expense since the domestic market’s contribution to MSCI or global portfolios is small compared to China’s weight.
That doesn’t mean that he’s “very bullish and thumping the table”. But given the correction, it looks like a good entry point to build a portfolio, he said.
If earnings come back, and elections give a favourable result, then markets would rally, according to Sivaram. Also, rate cuts would be front-loaded, he said.
Watch the interview here
Here’s an edited transcript of the interview:
Market was able to digest the India-Pakistan tension. Global markets also are substantially higher from the lows that they clocked in December or January. Are you more sanguine about the prospects or bit worried?
As far as India-Pakistan issues are concern, wars are never great for markets in general. As long as this doesn’t get into a larger issue, markets will digest this and move on and we have seen this before. For global markets, emerging markets have had a great start. They are already up 11-12 percent. China is up by 18 percent. We have had a great start for EMs on back of a reasonably poor 2018. So, many of these markets significantly under-performed the developed market. India has significantly under-performed that. It has its own set of issue with lot of uncertainties. When EMs rally this fast, India is more the defensive market. It is like the Levers (Hindustan Unilever Ltd.) of EMs.
When EMs rally so fast and so soon, India tends to under-perform because it is a steady market which outperforms over a longer period of time. India may catch up over the medium term, in six months or over a year.
I am positive on markets in general and India is offering a very good opportunity right now.
For insurance, you were saying that you don’t want to get into certain names since they were the fancy of the markets. All of them have corrected trading near 52-week lows. Are these stocks at good price or valuation right now?
They are cyclical in nature for life insurance. We are not selling protection, we are selling investment product. I am unhappy that they are selling investment product. Their 61-month persistency ratio is still at 50 percent. For a cyclical business, whose persistency is 50 percent, these valuations still don’t add up for me. I am still better off with a general insurance business. It looks much better. Their investments are roughly about 3.5-4 times of their net worth. If I have an investment book and I calculate 7-8 percent as a return in investment book, adjusted for tax at 6-6.5 percent, I get a 24 percent ROE just from investments. If I have a combined ratio which is less than 100, then it adds to my ROE. I am talking about a business which can steady state give me 30 percent ROE. This is much better than life insurance. I am still bearish on life insurance. Not for the cyclicality of business as the valuations are expensive but I can get a similar business with a similar growth in China for possibly half the valuation.
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How will investor appetite return for the auto sector?
I like this sector, specially two-wheeler and it is a part of the discretionary basket. Given where the valuations are, at some point they were valued as a consumer company. So, the valuations were too high for a consumer discretionary company. Typically, it gets valued at a much lower level. Today, the valuations are reasonable, but growth has come off. My view is that this is cyclically low right now because of various factors like regulatory changes which we have seen, and we may see some more as there are some changes coming up. We also had funding related issues. So, competitive intensity has generally gone up. A lot if this is a good point to look at some of these stocks and enter them.
It is not like the outlook for next six months is great, but this is a good point to build a position in some of these two-wheelers. May be with an 18-month view, they may give good returns.
What are your thoughts on metals and IT?
I am not an expert on metals but our house has a very strong view. We have significantly reduced our position in metals. Given that we take only three-five-year view, we may sit at bottom of cycle for two years and the stock may do nothing. It is not something which other fund managers with benchmark issues can do. Currently, they have their own set of issues. As valuation come down, some of them do look interesting.
I am not big fan of IT. The growth rates are in single digits of eight-nine percent growth rate. Nasscom has declined to give the guidance this year. I was reading some statistics where if you look at top 20 IT companies of the world, 11 are from the U.S. and nine are from China. 10 years ago, you had at least two companies from India. China has gone ahead and taken significant strides as far as IT is concerned. We were left doing mundane job which was more, in my view, body shopping.
If we don’t change then we may become insignificant given that you have AI, machine learning and many of the other technological developments which are coming today which could impact the low-end job that India does. I am not a big bull looking at IT from a three-five year perspective. Given that currently people are finding hiding spaces, this is a good hiding space to be in. I doubt if you make big money out of this. I would be wrong but that is my view.
On pharma, it is very stock specific. We have seen very high valuation for this sector and now that has come off significantly in line with global valuations. Indian pharma used to trade two times that of global generic pharma. That has come down significantly today. It is a good sign that people have figured out that both have similar risks. Very stock-specific, I am not a big bull on pharma.