India’s Valuations More Attractive Than China’s After Selloff: Aberdeen’s Hugh Young
India’s stock market tumbled as the new coronavirus pandemic brought the world to a virtual standstill. But that, according to Hugh Young, has made the valuations of Indian equities more attractive to overseas investors than China’s.
“India for us for quite some time has been a very attractive long-term market. We’ve had issues over valuations of India but with the recent sharp correction, it’s certainly brought the valuations back far more within our area of comfort,” the head of Asia Pacific at Aberdeen Standard Investments, which manages $644.5 billion in assets, said in an interview with BloombergQuint. “So I think India will see its fair share of cash going in. India relative to China, in recent months, has become a lot more attractive.”
The Covid-19 pandemic has forced India under the world's biggest lockdown, stalling all but essential economic activity. Local stocks tracked the worst global selloff in more than a decade before recovering some losses after the central bank and the government announced stimulus.
But the shock is expected to hurt corporate earnings in 2020-21.
“The markets are certainly out of sync at the moment with the actual economic reality that’s hitting many companies very hard,” Young said. “Of course, markets do look ahead, in theory, so they are looking towards the recovery and one should certainly be looking to put money into markets when they have such sharp falls. But the sharp bounce that we’ve seen is that a little too soon and too strong.”
There’s a high level of uncertainty and the first-quarter earnings will see a big impact, according to the market veteran. “It’s affecting all industries. For financials, it’s going to be a rocky period until the virus goes away. That doesn't look imminent, although the good news is that it seems to be stabilising in certain countries but of course at very high economic costs,” Young said.
So this year essentially is going to be a write-off for much of corporate earnings. The key thing to focus of course is strength of the corporate balance sheet.Hugh Young, Head-Asia Pacific, Aberdeen Standard Investments
Still, the Edinburgh-based investment company sees scope for financials to prosper in India.
“History does have a habit of repeating itself but I still think the strong Indian financials are the right place to be. The issue really has been the valuations on the quality financials like the HDFCs, HDFC Banks, Kotaks of this world, which have just been very high,” Young said. “So any potential hiccup in the economic outlook is an excuse for those prices to fall. I still think for our portfolios, it makes sense to maintain exposure. Providing more in the quality names as these are the right places to be to enjoy economic growth getting ahead when we get through this.”
According to him, strong professional private banks will weather these storms. They should lead a rally or should at least participate in a rally if they don’t lead it, Young said.
“People at the moment have been taking refuge worldwide and in India in consumer goods as [they] have been the steady earners. But I think when confidence picks up, people will refocus on some of the financials.”
WATCH | Aberdeen’s Hugh Young On Coronavirus’ Impact On Indian Markets
Here are the edited excerpts from the interview:
The big elephant in the room is crude. Obviously May was one specific contract because of the issues with regards to storage. But the fact that you’ve seen an agreement with the OPEC+ allied nations on a production cut. That has not managed to put in any confidence with regards to supporting the prices of crude. Where do you see this headed now on?
HUGH YOUNG: Oil prices are likely to be weak, certainly in the short term will remain weak, which is of course, generally, a net benefit for oil importing countries such as India. But the real issue at the moment is storage because oil is being pumped out of the ground every day and they simply don’t know where to put it at the moment the oil that’s not being consumed.
Let’s talk about the big, unprecedented environment that we are, created by the Covid-19, especially for global equities and emerging markets.
HUGH YOUNG: It has created a really rocky environment where all markets have reacted in tandem. If anything, developed markets in certain cases have been weaker than certain emerging markets. Obviously, China being the prime example of a market that’s held up surprisingly well despite being at the centre of the virus initially. So, for us, it’s certainly very high uncertainty, we’re waiting to see earnings announcements for the first quarter where you’ll see a big impact. It’s affecting all industries. For financials, it’s going to be a rocky period until the virus goes away. That doesn’t look imminent, although the good news is that it seems to be stabilising in certain countries but of course at very heavy economic costs. So this year essentially is going to be a write off for much of corporate earnings. The key thing to focus of course is, strength of the corporate side, that is the balance sheet.
Do you feel that the market is factoring in all these negatives that are still yet to unfold? We’re talking about the economic costs, global economic costs or the IMF putting out their outlook for global growth. But the equity markets have actually managed to bounce off the lows, and in fact, moved into bull territory. So do you feel that markets are a little ahead of themselves in terms of reading into the actual impact of this crisis?
HUGH YOUNG: Yes, I think in many ways, you’re right. So the markets are certainly out of sync at the moment with the actual economic reality that’s hitting many companies very hard. Of course, that is in large part a reflection of the amount of money that governments have pumped into the system. Of course, markets do look ahead, in theory, so they are looking towards the recovery and one should certainly be looking out to put money into markets when they have such sharp falls. But the sharp bounce that we’ve seen is a little too soon and too strong, I would say yes, it probably is certainly too strong. One expects bounces off to sharp falls, but it’s been a very strong bounce. One would expect markets to pull back and reflect the economic reality? Of course, we live in very strange times and with government intervention that puts another big question mark over things of what you think is logical doesn’t necessarily happen.
You have got central banks, lenders across the globe citing that they will do anything that is required to make sure that the damage is cushioned in any shape and form in the economy. But what does that do to their own balance sheets? Because you’ve seen how inflated the U.S. balance sheet is. How do you think that will play out there? Does that open up a new can of worms?
HUGH YOUNG: Yes, it does. To be honest, certain government balance sheets such as the U.S.’ haven’t been sustainable for years but they keep on expanding them. It seems a never ending piece of screen that they’re able to pull off or elastic that we’re all expecting to snap at one day but hasn’t yet. So I think that while it certainly creates complications, big complications, some governments still have that flexibility and aren’t in a complete mess. But you could argue that the U.S. and certain European countries are getting that way which creates another can of worms to be sorted out later in the day. That’s obviously what governments are thinking to go ahead and do it, it worked in the economic crisis that got over 10 years ago. Let’s keep on doing it. So it seems to be the response to all types of crises.
What’s your India view currently?
HUGH YOUNG: Well, I guess again, India a bit like the rest of the world, we’re waiting to see the effect of the lockdown on earnings. Also, waiting to see what stress there is in the financial system. Really, it’s been the financial system in India that’s probably worried us the most over the years not particularly to do with coronavirus, but of course, at times like this, you didn’t see the weaknesses that we all knew existed, potentially exposed. So, that’s certainly one of our concerns, which obviously is the markets’ concern because we’ve seen financials pull back quite sharply.
You’ve been a long-term investor into some of these marquee India financial names. Do you believe too that this time is different than the rest and therefore should the investing theories around Indian financials change?
HUGH YOUNG: Well whatever people say this time it’s different. One should always be very wary. History does have a habit of repeating itself but I still think the strong Indian financials are the right place to be. The issue really has been for a few years is the valuations on the quality financials, the HDFCs, HDFC Banks, Kotaks of this world have just been very high. So any potential hiccup in the economic outlook missing is a course or an excuse for those prices to fall and the valuations to fall with which they’ve been doing. But I still think for our portfolios, it makes sense to maintain exposure because providing more in the quality names, these are the right places to be to enjoy economic growth getting ahead when we get through this.
If this was a few months ago, pre-Covid-19, these would be the companies that you would want to own at any price any valuation. Now that there is this correction that is coming, prices have come back down a little bit to realistic numbers, do you feel that the next rallies are still going to be in the form of these financials, they are going to take charge and lead through the front, obviously keeping in mind that they are still the most heavy-weighted stocks in most of the indices.
HUGH YOUNG: I think they probably will. I think one has to wait a bit just to see the outlook for the economy because they’re obviously very sensitive to that. So, any hint of debt crises and the like, of course, will hold them back. But the strong professional private banks, I think will weather those storms. So [they] should lead a rally or should at least participate in a rally if they don’t lead the rally. People at the moment have been taking refuge worldwide and in India in consumer goods as have been the steady earners. But I think when confidence picks up, people will refocus on some of the financials.
What about the non-banking financial companies then? That’s where the trouble is.
HUGH YOUNG: Correct. And I think that’s a sector one always has to be very careful—the volatile end of the market. Simply because again, the financial system in India is far from perfect and when you’re at that end of the system, it makes it a lot more vulnerable.
When is the time when an investor or a company such as yourself starts looking at pumping in a lot more money in a market like India, in which FIIs have completely pressed a pause button currently. And which sectors stack up in terms of a favourable risk-reward ratio to make that happen?
HUGH YOUNG: Pumping a lot more money into India depends on two things. One, either as I think money coming in the door generally, which most financial institutions I suspect are not seeing money and second, in that case, more important point is how India stacks up compared to other markets within your universe, whether it’s a global universe or an Asian universe or a global emerging market universe. Certainly as far as quality of companies is concerned, India holds up well. It has some of the excellent companies in all those universes. So the issue then is valuations of the markets look like at the time. India, for us, for quite some time has been a very attractive long-term market. We’ve had issues over valuations of India. But with India doing what it has done recently and falling sharply, albeit rebounding a bit, it’s certainly brought the valuations back far more within our area of comfort. So I think India will see its fair share of cash going in. If cash comes back into the system and into equity funds generally, certainly in India relative to China, in recent months has become a lot more attractive because of the relative moves of markets.