Expert analysis by Muguntana Siva on the value of the Indian stock market and foreign investors.

Foreign investors are more concerned about market valuations rather than elections: Mugunthan Siva Updated - March 30, 2024, 4:26 pm. Mugunthan Siva, managing director, India Avenue Investment Management, shared his views on stock market valuations and other issues.

Mugunthan Siwa, Managing Director, India Avenue Investment Management

Mugunthan Siva, Managing Director of India Avenue Investment Management, an investment advisor based in Australia that provides opportunities to investors from Australia and New Zealand to invest in the Indian stock market, was in India recently as part of a tour of the country. Businessline correspondents met him to get the perspective of foreign investors.

Indian stock markets are trading at one of the highest valuations compared to other emerging markets. Is this justified? The relative valuation of Walking India compared to the rest of the emerging markets has always matched the premium rate, sometimes by 100 percent or at some points even exceeding 100 percent. Obviously, there are times when the premium becomes very high. It's high today, no doubt because of two factors. First, China, which is heavily weighted in the emerging market index, is trading at a steep discount, not only because of the growth challenges the economy is facing, but also because of global investors' concerns about "Will I get my money's worth?" Second, India offers macroeconomic stability, its market is much more transparent, and earnings growth has been very strong. This has allowed global investors to participate with confidence. Thus, justifiably, India's valuation is now the highest premium to the emerging markets package. But it is difficult to say whether this can be sustained. It is unlikely to be sustained. Perhaps China will attract investors again, if the stimulus works and the economy starts to revive, then investors will look to enter the Chinese market as a tactical play. Their valuations will rise and become closer to India's, although they may not equalize. In this case, India may experience a temporary adjustment as valuations are worrisome. My view is that in the long run, indi

We have a major political event coming up - an election. During such periods, do you usually decide to cash in or protect yourself with short-term positions?

It depends on the event. In December, the concern about whether the BJP can win the election disappeared. Nobody wants to say that this is the end result, but now it is close to that; it is just a question of how big the majority will be. So some of the risks that existed in November are now gone. I think the risk is not so much in the election but in valuations. Foreign investors feel that the election results are already factored into prices, and perhaps the risk comes after the event. Markets always buy rumors and sell facts. They may say, "okay, we've played the BJP comeback story and now it's time to pause." There is a lot of optimism about the India growth story in the world today. But when you meet Indian CEOs, do you see that optimism reflected here?

There are two different things here. One is economics and profitability, and the other is investment, sentiment and market valuations. When we meet with companies, the message is pretty clear. The business environment is good, companies have good balance sheets, debts are not high, cash flows are stable. So there are favorable factors for the economy, thanks to government programs like PLI encouraging industry growth. But valuations are a completely different story, and that may be a concern for businesses. The environment is probably the best for most Indian companies in the last 15-20 years. The major positions in your portfolios are industrial, real estate and healthcare, which are not major weights in the index. Why did you pick them?

Health care also experienced a downturn after 2015. Pricing has been severely compressed and valuations have been lowered. Our view was that Indian pharma companies may have the same opportunity as Indian IT companies had, say, 20-30 years ago. The dynamics of the industry should improve now. It will be a favorable time for many Indian generic manufacturers because US companies are weaker, they have more debt on their balance sheet and it will be difficult for them to raise capacity. India is the first region to have FDA-approved plants outside the U.S., so Indian firms are in a very good position to capitalize on that advantage. This is how we think when we set sectoral weights. We are not too concerned about index compliance. Our objective is to try to achieve alpha.

You have argued that the China plus one strategy is being applied in India. But there was a lot of noise about it two years ago, and all the stocks in the chemical industry were significantly overvalued. Then the disappointment followed and the stocks fell. What is your view on China Plus One now? I think people expect change to happen too quickly. "China plus one" is happening, but it is happening at a slow pace and we will have difficulties along the way. If you look at Vietnam, the Philippines, Thailand, Bangladesh, India, they are all slowly increasing their share of global production. No one can replace China because no one has the scale yet to produce at that level. But they will capture market share. For India to go from 3 percent of global production to 4-5 percent is important.

Yes, the inventory drawdown in China is having an impact on prices in some sectors. But when the dumping is complete, sectors like specialty chemicals will become attractive again, especially when everyone leaves that trade behind.

How is the perception of investors in Australia towards India changing? If you go back seven years, we found that it was not easy to tell a story about India. Most people said they would get their exposure to India as part of their emerging markets investment fund. But today they are much more open to viewing India as a standalone investment.

You have a lot of local investors and also individual retail customer participation is growing. Foreign investors will also increasingly fall in love with India, so I think flows to Indian equities will be good for the next decade. In this annual trip, we bring investors, researchers and consultants to India. We show them how regulators and the central bank work. We introduce fund managers and consultants and show them their options so they know their money is in safe hands. We also visit some companies because many people don't realize the scale until they see it. Then they have a "eureka" moment and say, "okay, this is the place I need to invest in."