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Dubai: In volatile markets equities rarely stand out as a "safe" investment. But then, isn't "safety" a question of understanding and perspective? Thirty to sixty feet waves, although treated with respect, are frequently brought under control by the "big wave" surfers off the Hawaiian shores.
Volatile equities are not so fearsome to those that believe that crashing volatility will bring the reward-surge of the "big wave surfer".
It might be that Indian equities will turn out to be an equity equivalent of the Hawaiian-Wave adrenalin rush. Once upon a time this was an arena reserved for Indian investors, like the Hawaiian Sea, only the locals played it. This globalised world changes everything.
For foreigners entering India's equity waters, I spoke with Ajay Argal, fund manager of Birla Sun Life's 'India Advantage Fund'. Lipper ranks this fund as the 11th best of a universe of 6,302 funds over 10 years. A position partly based on the fact that the climate for Indian equities has produced an "adrenalin-rush" equity environment. Yet it is of significance to Gulf News readers because any nationality can jump onto this surf-board via its Mauritius-based domicile. Such a decision is a no-brainer for Argal, who believes: "India is one of the biggest and fastest growing markets in the world. A global investor can't afford not to have weight in India."
Potential
If this wasn't obvious when mature market, US dollar-influenced assets ruled the global roost, a myriad of fairly serious expectation-management corrections has changed this. Asia, and India and China in particular, are in the "can't be ignored" box.
In any case, Argal now positions India as a big market, capitalised at over $1 trillion, and "somewhere between the top 12 to 15 markets in the world, although more important than its size is its ominous growth potential", he says. Only China is seen by Argal to have the same amount of emerging market potential. The growth issue provides Argal with what he believes will be the greatest degree of comfort and safety during the inevitable equity volatility. "This is an environment we expect to see move at a GDP growth-rate of 7.5 per cent per annum over the next three years. Whilst it is true that the last four-five years has also witnessed a 7.5 per cent annual growth rate, and whilst we recognise slowdown potential in other parts of the world, we remain aware that India has huge domestic demand and is not dependent on external demand" Argal points out.
Three prominent drivers underscore Argal's confidence. The first is in the youth of the country. Staggeringly, about half of India's huge population is under the age of 25. This would represent a significant advantage over the other top 15 markets in the world.
India's need to address the needs of a "graying population" isn't as dire as the likes of Japan particularly and 'The West' generally. Whilst diet and health care may take the credit of this demographic, the benefit will be India's in the form of increased productivity with increased domestic demand as disposable incomes rise.
Argal's second driver is the low penetration of credit products in India "at every level" says Argal. As an example, Argal points to the fact that house mortgages are 10 per cent of India's GDP. In Thailand and Malaysia, in contrast, the rates are at 40 to 50 per cent. Drivers one and two would appear to be harbingers of dramatic social change and one that will manifest itself in terms of rising domestic consumption.
The third driver recognises that all potential means little without a serious commitment to building an infrastructure worthy of one of the fastest growing econ-omies in the world. Roads, schools, hospitals, energy plants, indeed all the usual features that comprise the skylines of the busiest places on the planet. Much of this infrastructural development, Argal points out, is being hastened through public contracts and/or public-private initiatives.
Strategy
So what of Birla's strategy? Argal describes the stock-selection as "a diversified large to mid cap portfolio". The large caps tending to provide the stability during times of extreme turbulence and the mid-caps providing the medium term opportunity. The benchmark indices are the Sensex and the MSCI India, and it seems that Argal has a focus on his own "nifty-40-to-50" stocks to get him above the indices. Interestingly, India's biggest stock, Reliance Industries gets an odd "thumbs down". Odd because it is the biggest single stock weighting at 8.5 per cent of the Advantage Fund. However, the stock is about 14 per cent of the index so the fund manager is clearly underweight Reliance Industries.
Reliance gets their money back through the selection of Reliance Communications in the telecom space, as is Bharti Airtel. They reflect a telecommunication weighting of 7 per cent of the total fund. The other major sectors featured are: banks and financials (14 per cent); infrastructure projects (11 per cent), and petroleum (Reliance featuring here as well) at 10 per cent.
The Mid-cap stocks are among the more interesting selections as they are perhaps less of a household name even for Indians.
Birla's India Advantage fund now provides an example of a growing breed of Indian Offshore Funds originally targeting Non-Resident Indians (NRIs) but increasingly finding themselves in communication with other non-residents.
The writer is chairman of Mondial Financial Partners.
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