Akash Prakash, CIO at Amansa Capital, Shankar Sharma, Vice Chairman and Jt. Managing Director at First Global, and N Jayakumar, President at Prime Securities, share their views during a panel discussion at the Morningstar Investment Conference held in Mumbai..
Are emerging markets history?
Shankar Sharma: If you ask an emerging market fund manager, one who is prepared to be honest and there are not that many who are – I mean, let's say, you represent emerging markets via an ETF, so the EM ETF. I was looking at the chart and it's 33 or 34 bucks in 2015 going into 2016. That's exactly where it was in 2006. The 10-year returns are zero.
I was talking to an EM fund manager and asked him why guys like him get 1.5% for doing this. I can buy an Asian high-yield bond fund ETF, which yields me 4%. I get leverage of 4 times and I make 16%.
You could have picked great stocks, that there is no debate. But it has been a very disappointing asset class.
But returns are never linear in any stock market, even the Dow between 1969 and 1982. You have to stay invested to take advantage of the markets when they move up. So why is that different for emerging markets?
Shankar Sharma: I'm not saying it's different. All I'm saying is the plain reading of the data. The tape is telling you something that is not very attractive: 10 years, zero return. Maybe things change 10 years out. That's a different issue. But the past has been terrible for Ems.
All I'm saying is that the markets have said something, now it's up to us to accept it. In my view, EMs are looking patchy. Some parts are terrible, some okay. India is in the okay category. I don't see where the big upside story is coming from.
Why are emerging markets suddenly like hemlines are hairstyles out of favour?
Akash Prakash: Emerging markets really is an incongruous construct. It's a whole bunch of very different types of countries from Korea to India to South Africa to Brazil. So, to bunch it all together I think is first probably incorrect.
If you look at last four or five years post the crisis, there clearly has been a serious disappointment, both on growth and ROEs. ROEs are now below developed world averages. Growth is slower than developed world averages.
The macro vulnerability from being less vulnerable post the crisis to now, EMs are where the next stress points are.
Why? Because of high debt?
Akash Prakash: Partly. EMs have taken the advantage over the last five years to lever up very significantly.
Secondly, a lot of these countries have not done the hard reforms which are required to sustain and accelerate their growth rate. So, some EMs are caught in the middle income trap. Brazil is a classic example. The window of high commodity prices, very low interest rates, easy liquidity - most countries have not used that to fundamentally get their house in order. Now they are paying the price because commodity prices have come down, there is no growth, high debt levels, currencies and current accounts are vulnerable.
Over the next three to four years, if you look at the EM construct, 40% of the index would be China. This is a shocking stat. After they start including the A shares, EM will be basically a Great China index because 50% of the index, if you include Hong Kong and Taiwan, will be China. So, when you're buying EM what are you really buying? In three years' time you'll basically be buying Greater China.
And China has problems.
Akash Prakash: The construct that people use to analyze China which is to look at par growth or railway freight, metrics like that are horrible. They are not, in my view, the right metrics to look at China going forward. You have to balance it by looking at the service metrics as well.
China is clearly slowing. It's no longer going to grow at 8-9%; probably somewhere between 5-6%, but that's still reasonable. It's not collapsing. It's not a huge recession.
China is five times the Indian economy size. It's at least 10-15 years ahead of us on almost any metrics and it's not going away.
Is India the Cinderella of the emerging markets ball?
N Jayakumar: I was in down south in the U.S. recently - Atlanta, Georgia. Atlanta probably has a population of under a million. When we visited the Atlanta zoo, the zookeeper asked us where we were from. When we told him, he said: “India, that's where all the money is going these days.” This is not a fund manager whom I was speaking to.
India is, however terrible that sounds grammatically, "the most consensus by trade" right now. There are periods in history where consensus can be right. India is great long term and even medium term. Over the short term there could be problems. So, give or take a few words, everybody has the same thing to say about India.
Let's assume for a moment that the consensus is right. Clearly, consensus is not going to make money in India, which means that just buying the Indian index you're not going to make money money. So, there has to be much more in trying to seek alpha.
We've not had a disruptive element in India. The world - whether Russia, China, or the U.S., has had disruptions to existing thesis. The only disruption to our thesis is that the government is taking time. Other than that the story is intact. Let there be one disruption to our carefully handcrafted picture, I'm saying handcrafted in a positive sense, and then let's see where the disruption takes us.
Shankar Sharma: Talking about your trip to Atlanta, I remember the early parts of the FII boom in the mid-'90s, where hundreds of Indian companies went out and raised GDRs. You had Sanghi Polyesters, Garden Silk Mills and some scandalous names.
One day I asked my analysts to collate some data. We had no idea what the GDR market itself was. We decided to find out in the last three years which countries raised the most money. I thought India would be 2%; India was 97% of that market. We were the only guys out there looking for money and getting it. So money is always coming to us. If you had gone to the Atlanta zookeeper in 1997, he would have said the same thing as he did today.
Do you agree there is no disruption going on in India? Political disruption has happened.
Akash Prakash: I would tend to be with Jakes in a sense that I think the mood is clearly shifting on this government in the sense that I think the people are starting to – their patience is starting to wear thin.
I think there is some disillusionment. Let me put it this way, I think the sense disillusion with India reduces the further away you are from India. So, if you're in India, I get a sense, we were getting very disillusioned. There's lot of nervousness, skittishness. You go to London or New York, people are still saying, what's the big deal? You're growing at 6-7%. Brazil is -3%. Russia is -4%. China is 5-6%.
In India, maybe the expectation was probably too high. But there is a clear sense at least that the government has not delivered what people expected.
