"Buy into dips, unless you think India is structurally challenged"

Fidelity India’s head of investments prefers companies with strong balance sheets

Alexander Treves, 39, Head of Investments at Fidelity India has lived through financial crises for a good part of his career. In mid-1997, the South East Asian crisis brewed after he had spent a couple of years on the buy side. In 2000, around the peak of the dotcom bubble, he moved to the UK as a fund manager overseeing pan-Asian markets. In 2006, he moved to Fidelity as Head of Research in Tokyo, only to witness the 2008 meltdown. Now in India he is living through a global contagion, thanks to the Euro sovereign crisis. Though the macro environment is challenging, Treves, who oversees assets close to ₹10,000 crore, is keeping his wits about him. Excerpts:

You have seen quite a few financial crises from close quarters; does the current state of affairs bring back memories of the first crisis?

What you had in 1997 was that in a bunch of South East Asian countries, corporates were taking advantage of the exchange rate stability to borrow in dollars as overseas borrowing rates were lower. That worked fine as long as their local currencies stayed stable against the greenback. But they got trapped when the currencies started weakening, making overseas debt expensive to service. The Euro issue is a bit trickier as the question now is, who will bail out Europe given that the US and other countries have already spent a lot of money fighting the crises in their own backyards. The second part of this is that unlike the Asian countries that returned to relative health through the late ’90s by devaluing their currencies, neither Greece nor Italy have a currency to devalue. That’s the fundamental difference.

How are you then positioning your India portfolio in the current situation?

The biggest Indian companies are over-researched by the sell side. But once you get below the top hundred stocks, the research falls away very quickly. So, we think that on a bottom-up basis we can find a lot of opportunities in this market. There are some financial stocks in India that we think are very good as this is a market where, over time, financial penetration will increase. I would also say there are some manufacturing stocks that are worth looking at. They may be quite bland, but I think India is very underpenetrated compared with the rest of the world. If you live outside India, very little of what you own is made in India. All the stuff bought for my kids in Japan was from China. Now they are in India, almost all their stuff is still made in China. That is counter-intuitive because India has a large pool of cheap labour and is well integrated with the rest of the world. So, over time I think we will find more companies that will sell more things to Indians and the rest of the world. 

But do you see that awareness coming through in economic policy making? 

India is not China. Here, the government does not need to create a manufacturing sector. Having said that, infrastructure-driven inflation is an impediment and we need the government to address that. High interest rates due to inflation concerns have led to an investment squeeze. That is a pity because unlike in China where more investment is inflationary, I think in India more investment is disinflationary, because inflation here is caused by bottlenecks, not by mass investment. If the government creates infrastructure then that will reduce part of the inflation and will also create space for the manufacturing sector to build more. The world is aware of the India growth story. In that context I think the magnitude of FDI is less than I would expect. Long term capital flows offer some stability, which portfolio flows may not.   

Does the fact that Indian firms have no capex plans in FY13 worry you? 

When I first looked at Asia in 1996, India was a footnote. Only six to seven years ago did people begin to understand India. From foreign investors’ point of view I think it [India] has arrived today. People are more interested in India than they used to be and in future there will be a lot more invested here. My view as an investor in India is that this is a speed bump. I think Indian companies, if the situation changed, could roll money out again fairly rapidly. A lot of companies are cautious in their plans but the fact is that equities have fallen substantially. So, unless you think India is hugely structurally challenged in the long run, it is better to buy into dips rather than sell into them. 

Are you saying that a worst case scenario of Euro disintegrating is factored into market valuations?

I don’t think a collapse of the Eurozone has been factored in. There is no precedent for what is happening in Europe and, therefore, I will not be able to draw a parallel to what is happening in India. So, you need to work out where the opportunities might be as the market will move aggressively. The reasons to do this analysis is that you don’t wait till the markets move and then analyse. First thing you try to do is work out what your sensitivities are, what your valuations are and then, if your share price approaches a level that you think is ridiculously cheap, you can move in straight away. So, in late 2008, when Lehman Brothers went bust, it didn’t feel good at all. But we made sure that our portfolio managers were focusing on what they were meant to, which is looking at the right opportunities. 

How much cash are you sitting on in your India fund?

We are careful not to have too much cash on our portfolio. The core of it is that people pay us fees to manage equity portfolios on their behalf. But at the moment we have a bias towards balance sheet strength. We don’t have low quality franchisees and are staying away from regulatory risk. So, if you have uncertainty around those issues we don’t invest in the sector. We also avoid stocks that we think are overvalued. For example, investors have been buying domestic consumer stocks because they feel they are secure and not because they offer value. Real estate is also a complex sector. It can be hard to model revenues through the life of the project and there is also the issue of leverage. We don’t need to invest in every company. We only need to find the ones that are mispriced.