Consistent rules are important but change bearable for high RoE

Foreign investors like consistency when it comes to rules for investment in a country, said Joel Werner, chief investment officer at Solitude Capital Management, referring to the increase in surcharge on foreign portfolio investment (FPI), which the government recently withdrew. While the tide has been against the Indian automotive sector, Werner told Sanam Mirchandani that he would like to own two- and four-wheeler stocks as they are trading cheaper and have great franchise values. Edited excerpts.A third of your overall allocation is towards India, but India has not been favoured by FPIs despite measures taken by the government to boost liquidity. Stocks have fallen sharply. Would you allocate more at this juncture?Yes, absolutely. I am very positive about the Indian economy in the long run, including the stock market and select companies we find attractive. The change in the tax code surprised many and I am glad they are taking a more nuanced look at how that would impact flows. In India, the economy is doing poorly, things are so challenged. One of the problems with India for FPIs is that the names that are liquid enough for very large institutional managers are going to be the banks. It is going to be the banks and a handful of other businesses that are very much driven by overall GDP (gross domestic product) and asset-heavy businesses.We are very concentrated in our investments. What investors see is that the rules are better but they could change to bad again after I become invested in a way that I don’t really understand. It seems chaotic. People don’t like that in general. Having a consistent set of rules is more important. India is a developing country. The rules and norms and institutions are evolving and becoming better. With that comes a certain amount of change. I’m willing to bear that if RoE (return on equity) is higher.In this scenario of economic slowdown in India, which are the sectors you are bullish on?Right now, the thing that everyone is focused on primarily in India, is the slowdown in money supply and lack of lending and how that has affected everything. Money managers are focused on where they have taken lot of risk, such as non-banking finance companies (NBFCs). Those companies were trading at relatively high valuations and now find funds lacking. It trickles down to the consumer’s inability to purchase. It creates an overall economic malaise among consumers, who are not ready to make a decision.Look at the housing market. There is a lack of affordable housing supply. There are, maybe, 2 million units of stranded, unsold property right now with developers, but in order to meet demand, you are looking at 20 million (units), which is necessary over the next 5-10 years. Prices have come down but developers can’t lower their prices to sell the remaining inventory. They have to keep building new projects and keep financing, which is a really difficult situation.We are excited about derivative plays in housing, such as pipes and paint. We have invested in the internet sector. There are a limited number of ways to play internet-enabled advertising in India. We like companies that have conservative balance sheets. We typically hold between 10-20 cents of cash per dollar in our fund. We would like to own two-wheeler and four-wheeler businesses; they are trading cheaper right now.The auto sector has been out of favour for quite some time. Do you see sentiment in these stocks picking up?Prices of these stocks have come down materially. Units are down 20%-plus year-on-year, a lot of which is driven by price increases because of the new emission standards. Emission standards on the four-wheeler side are not very clear so people are not sure about what they are going to do. There are two stages of emission standards and the government has been clear which emission standard is going to be required, going forward. Some of the overarching requirements for electric vehicles are probably not really attainable and don’t make sense. Net-net, certain original equipment manufacturers (OEMs) have great franchise values.The US Federal Reserve is not in favour of a lengthy easing cycle. Do you see it cutting rates?I would expect the Fed to cut rates by 50-100 bps over the next six months. We are in what is commonly known as a foreign FX war. It is not a great situation. Things can get out of hand very quickly. It is just somewhat unchartered territory.

from Economic Times https://ift.tt/2NLjMzO