Principal Global Investors is underweight on India and Malaysia, but overweight on Brazil and Mexico.
Michael Marusiak, Portfolio Manager of Principal Global Investors says that they like the infrastructure and consumer space in India. He adds that they have seen inflows in their fund in the last month.
Marusiak also mentions that they have invested in small caps, midcaps and large caps. He further states that their top three holdings include Infosys, BHEL and ACC.
Excerpts from CNBC-TV18's exclusive interview with Michael Marusiak:
Underweight on India, is it purely on a valuation basis, do you think it's overvalued or do you have some doubts on the future sustainability of growth?
At Principal Global Investors, we do not invest on a top down or a country or a sector basis, but rather we believe that superior stock selection combined with disciplined risk management is the key to consistent outperformance. So we look for companies with improving and sustainable business fundamentals where we see rising investor expectations and whether those socks are attractive relative valuations.
So whether we are underweight on India or Malaysia as you pointed out is not a comment on what we see going on in those countries, but the fact is that at the moment we are not finding enough stocks that we can invest in. But again because of our focus on stock selection, we are very close to the benchmark weight, which is the MSCI Emerging Markets Index.
What has been your experience though with your emerging markets fund in terms of inflows, or have you even had to face redemption in the past month?
It's been an interesting year and the first four-four and a half months of the year were marked by very-very strong inflows, in fact it was record setting. Then there was a turnaround in about the middle of May where we started to see redemption across asset classes as a whole. This was clearly triggered by the market getting a little concerned with some of the economic numbers coming principally out of the US.
The market began to get a little concerned with inflation and the prospect of US raising interest rates a little more. In the past months or so, these flows have actually steadied. But I think we are watching the last four months of the year very interestingly.
Tactically what have you done with your investments into a market like India? Are you sitting on more cash at this point, or are you mostly invested?
At Principal Global Investors, we run fully invested portfolios. Our target cash levels in all markets is 1% and we are focussed on stocks with the improving and sustainable business fundamentals that I mentioned earlier, and again we do that in all markets. We do not allocate our assets across countries and sectors, but we merely pick stocks.
In India is it midcap, largecap, are you biased towards any particular size of company? What is the portfolio looking like at the moment?
We are in smallcaps, midcaps and largecaps probably approximately equal to their market cap weightage. So we have no tilts in that prospect, particularly
What is that you like as a story in India though at this point?
There are a couple of sectors that we find particularly interesting in India. First and foremost, it is the infrastructure sector. And here I would like to compare India and China. When I go to China, I land in a place, in a very brand new airport, multi-lane highways, ferrying me very quickly into my hotel and so it is a very easy market to invest in from that point of view.
But when I go to India, I see the infrastructure is not quite there, which I think is the great opportunity within India, as these get built-up the related companies will do very well.
The second sector that we like but is a little more difficult to invest in, is the consumer sector. The India consumer is still in a very early stage of a boom and a lot of what we have seen in the Indian economy in the past few years has been fuelled by aggressive increase in consumer credit and it looks like it will continue.
There are obvious potential risks around; whether the government decided to crack down on that, as has happened in other countries and slowed down that growth a bit. But coming from a very low base, I think that story has a lot of years still to play itself out.
What are your top holdings at this point in India?
In India, our top three holdings are Infosys Technologies, Bharat Heavy Electrical Ltd and Associated Cements.
Anecdotally, what are you hearing about emerging market funds and inflows for them? Are you even hearing of a churn, perhaps happening from other asset classes, whether it is commodities or even fixed income?
I think the market really does know what it wants to do right now. I think we will focus on what will happen in the interest rate environment, particularly in the US. I suspect until we get a bit of clarity on that, flows will remain broadly flat and that is what we have seen in the past month or two, very small net inflows.
I think over the longer-term, emerging markets are well positioned to capture sustained and increased fund flows throughout the rest of the world. So there are plenty of very interesting opportunities within emerging markets.
One should remember that this is an asset class that represents 86% of the world's population, 43% of the world's GDP and yet only 8% of the world's market cap; the market numbers have to change.
The world is under invested in emerging markets and going forward, there are a lot of positive trends that the market is starting to see and that will be rewarded by the positive inflows or asset class as a whole. And I think, over the next 10-15 years, it will be pretty exciting for emerging markets.
Any Indian midcap stories that Principal Global likes at this point?
I will rather not comment on specific stocks. But I will say that we are finding a lot of midcap opportunities in the two sectors that I mentioned earlier. Hopefully, we will see more opportunities in the consumer sector in India coming up soon.
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