India remains a challenging market as inflationary pressures are high and the government hasn’t been moving fast enough to cap the rise, eroding investor confidence, Vanessa Donegan, head of Asian and emerging market equities at Threadneedle Investments, says.
Corruption and bureaucracy have also hindered investment in certain sectors such as infrastructure, Donegan says. “We had quite a few problems with corruption and permits haven’t been given. Investment has come to a bit of a standstill but we know they desperately need to create more infrastructure.”
“We are looking at some point to go back into India again, but we first need to see clear evidence that inflation is peaking, which India is lagging the rest of the region, and there will be scope, like China, to start easing monetary policies but we’re not there yet.”
India always trades a little bit more expensively than the rest of the region, she adds. “There’s been quite a severe de-rating because people have been nervous how the Indian authorities are going to manage the slowdown, rather like in the case of China. But we’ve got greater confidence in China than we have in India, then maybe that will get sorted out.”
Threadneedle is overweight in China where the government has managed to get through the worse of the inflationary pressures and monetary tightening has worked with credit growth now at a more normalised level, Donegan says.
Asian economies are likely to see slower growth in 2012, and although risk aversion remains high globally, investors can still profit from their investments in some regional markets. Growth hasn’t helped markets in Asia, but the key is for investors, is finding niche areas where there is a structural growth story, she says. “It’s really finding the strong companies that can survive in a difficult market and gain market share from the smaller, less well-capitalised companies.”
“One could have gone completely into the very defensive areas but it’s still possible to make money out of those companies in Asia, which are exposed to the global economy but do have a competitive advantage because they have a strong franchise, can deliver well, and are well-managed and well-funded.”
Industries that show good growth include those that cater to consumer and discretionary demand, emerging market banks in economies where the consumer is underpenetrated and have the ability to lend, and telecommunications.
Threadneedle is overweight in Korea and sees the country as a long-term investment theme. Indonesia is also a gem where the economy is benefiting from the strength in commodity prices, a stable currency and slowing inflation, Donegan says.
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