India's valuation is not demanding in absolute terms, says Noriko Kuroki

The BSE Sensex touched a new all-time high on Wednesday. But while stock markets have surged in recent weeks following the victory of the Narendra Modi-led Bharatiya Janata Party in the Lok Sabha elections, Noriko Kuroki, Executive Director - Client Portfolio Manager at JPMorgan Asset Management, has pared her exposure to Indian equities. Singapore-based Kuroki, who manages assets worth $50 billion as the head of emerging-market equities, shared her views on India and other emerging markets with Mahesh Nayak. Excerpts from an interview:

Q. Are happy days back again for Indian markets or is it still to premature to be happy and why?

A. Although the decisive victory of Prime Minister [Narendra] Modi is believed as unequivocally positive for India, his administration has a long list of reforms to deliver. The market has gone sideways since the election, as investors wait for clearer sign-posts from the new government. India's valuation is not demanding in absolute terms but it looks relatively expensive against other emerging markets, even with the growth premium it deserves.

We are very comfortable with our core holdings in India, as we have conviction in their ability to deliver growth even without the reforms. However, looking at the share price performance of those names /sectors which are more dependent on policy reform, it looks like the market has discounted a lot of possible positive outcomes. Meanwhile, we would be a buyer if we see a meaningful correction in the market as we did in 2013.

Q. What is your sense on the global economy and financial markets? Do you see emerging markets outperforming developed markets and why?

A. As emerging markets struggled relative to developed markets over the past couple of years, emerging markets' valuation now looks attractive relative to developed markets. Long-term earnings expectations for emerging markets are close to all-time lows, just like in 2003, which marked the beginning of a multi-year emerging market bull market. Emerging market economies have de-coupled from developed market economies which have accelerated. However in a world of globalisation, these periods of decoupling have been short-lived.

There are some signs that exports in emerging markets are re-bounding, and this recovery in exports should filter through to domestic demand. This, in turn, should help corporate earnings expectations in emerging markets, which have been weak so far, hence acting as a catalyst for emerging markets.

Q. With the US tapering programme on course, what is your view on the US economy and how is it going to impact markets in India and other emerging markets?

A. We should differentiate the tapering and the rate hike. The Fed [US Federal Reserve] has made it clear that they are in no hurry to start raising rates, and the recent choppy macro data from the US and Europe also points to a more dovish view. A prolonged low-rate environment is, in general, positive for risk assets such as emerging markets as well as India, which runs a current account deficit.

Q. Which emerging markets do you view positively and which ones negatively?

A. From the top-down perspective, we have preference for countries with cheap valuations, such as China and Korea. We believe macro headwinds in China are manageable, while Korea is well levered to the global economic cycle (IT, autos). We are more cautious on defensive and expensive markets such as ASEAN and Mexico.

Q. In the current scenario, what should India be focusing on - strong growth or a stronger rupee?

A. A weak rupee has helped India to restore its export competitiveness, thereby reducing the current account deficit. We would like to see the central bank continuing to focus on targeting inflation. This should help in keeping the rupee stable, which is growth positive.

Q. As an investor what would be your strategy to invest in emerging markets?

A. Our Emerging Market Opportunities fund combines top-down and bottom-up inputs. Unlike in developed markets, top-down inputs, in particular country allocation, still make up significant parts of returns in emerging markets. At the top-down level, we focus on valuation opportunities. Emerging market is a cyclical asset class, as such at the bottom-up stock level we focus on long term, secular investment opportunities and quality of companies we invest in. As a result, the portfolio has a value bias but a quality tilt.

Q. In the current market condition, what are you advising clients?

A. Emerging markets is a cyclical asset class, so investors should have a medium- to long-term view. There is also significant differentiation among different emerging market countries, which can change over time - hence, active management in emerging markets can add value. Picking a winner among more than 20 countries within emerging markets is tricky and the trading costs to move in and out of different countries can be significant. Overall, emerging markets are offering compelling value both in absolute and relative terms. Thus, our view is that it is a good time to start accumulating.

Q. How do you see the flow of money in emerging markets? Do you see it increasing in India and why?

A. Institutional investors have been steady buyers of emerging markets equity as their strategic allocation for these markets has been moving up. Retail investors have been selling emerging markets. However, we have seen flows coming back to emerging markets since mid-March. Foreign investors remain positive on India, as flows remain positive.

Q. What are the concerns for India and other emerging markets?

A. For India, short-term challenges include escalation in tension in the Middle East and rising oil prices as well as a poor monsoon season (both of which are negative for inflation). For other countries, it is difficult to generalize as many countries have their own issues - for example, China, Brazil, Russia are all facing different challenges. (China - rebalancing of its economy, Brazil - Presidential election in October, Russia - political developments over Ukraine etc.)