Emerging markets are seeing fund outflows

With interest rates due to rise in the US, emerging markets (EEM) (VWO) are seeing increasing fund outflows. The U.S. Treasury offering higher interest rates lured investors in other sovereign debt over to the U.S. In India, Prime Minister Narendra Modi’s decision to demonetize certain high-value currency notes in circulation has led to an added pull-out of institutional funds from the country. However, “Demonetization is a good long-term gain for India,” said Devan Kaloo, AM at Aberdeen Asset Management (ADN.L) in a conversation with ET Now on January 17. “Demonetization has delayed consumption, not killed consumption,” said Kaloo.

Read Can India Keep Growth Above 7% After Demonetization? and India’s Industrial Surprise Following Demonetization for a deeper perspective on the topic.

Low sovereign ratings not justified for India: Aberdeen

Aberdeen is without a doubt, bullish on this Narendra Modi-led emerging market (EEM) (VWO). The firm believes the low sovereign ratings for India (EPI) (PIN) (INDA) do not reflect present realities. Standard & Poor’s credit rating for India stands at BBB- with a stable outlook. Moody’s credit rating for India is set at Baa3 with a positive outlook. Fitch’s credit rating for India was last reported at BBB- with a stable outlook. All of these represent the lowest investment grade ratings that can be given to an economy. For most ratings agencies, the country’s public debt burden is what is keeping them from raising their outlook on India. Considering India’s government debt to GDP ratio stood at just 69% in 2015, Aberdeen believes in India’s potential to secure better ratings than these.

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Why Aberdeen likes HDFC and ITC?

Kaloo also shared Aberdeen’s basis for its inclination towards two Indian stocks; HDFC (HDB) and ITC. These stocks command a good 3.7% and 2.7% allocation in the Aberdeen Emerging Market Fund (GEGAX) (GEGCX) (GEMRX) (ABEMX) (AEMSX) portfolio, respectively.

  • Aberdeen sees banks recapitalizing well enough, with loan growth offsetting the accompanying increase in competition. “HDFC is one of the best banks in India and has a fabulous track record and great management,” said Aberdeen’s Devan Kaloo. We find ICICI bank (IBN) also commanding a 1.3% allocation in the aforementioned portfolio.
  • Cigarette companies should gain on the back of premiumization in India. For Aberdeen, ITC is “one of the cheapest multinationals” in India.

Moreover, Aberdeen believes that “Indian IT, on a relative basis is more insulated from the potential risks of Donald Trump.” Accordingly, we find Indian IT multinationals such as Infosys (INFY) and Tata Consultancy Service (TCS.NS) holding a 1.6% and 0.9% portfolio allocation, respectively, in the company’s emerging market fund.

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