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View on Indian markets: Cautious optimism, says Aviva Investors' Aaron Armstrong

The asset management business of UK's largest insurance company says they see some of the most 'captivating opportunities' anywhere within emerging markets in India and specifically, within financials.

, ET Bureau|
Dec 13, 2019, 11.25 PM IST

"Our view on India is one of cautious optimism."

Indian markets, over the past few months, have seen a strong bounce back. While there is a strong flow of foreign fund, the wave hasn’t lifted all the boats. Clearly, there is a strong disconnect between the Indian economy and Indian markets.

Aaron Armstrong, emerging markets equities portfolio manager with Aviva Investors, investment arm of UK’s largest insurance company, gives insights on Indian markets, its fast-growing insurance sector and whether India can become the next China.

Excerpts from the interview with Jwalit Vyas:

What is your view on the Indian markets?
Our view on India is one of cautious optimism. The recent upturn in the market has a slight disconnect from what is happening at individual companies.

A key point of note here is the lack of breadth to the rally. There are a handful of large-cap stocks driving the market higher, and some of those trades are starting to look very crowded. This is particularly the case for those blue chip, supposedly safe bets in the consumer sector. If they begin to correct from 60 or 70 times price to earnings, there could be a lot of pain on the way down for many investors. Autos is another area where it’s important to be very selective. The sector has rallied in the last couple of months, but that doesn’t really tie in with the data. Companies like Hero, where we see a really interesting shift in their product portfolio, or Ashok Leyland, where the company has transformed itself in recent years, look like offering much better risk-reward than taking a sector-level bet at these levels.

More broadly, we would have expected more support from the government to address this downturn. FIIs, especially, would have been surprised by how long this has lasted since IL&FS was back in August 2018. Nobody would have thought that more than 12 months on, we haven't really moved forward. From a GDP headline perspective, the economy has moved backwards. That may have caught a few foreign investors off-guard. It's caused them to try and play it safe.

What are the stocks that you like?
Some of the names we like the most would be ICICI Bank or HDFC; they’ve been great performers for us of late but we still see lots of potential left in them given the size of the opportunity.

We see some of the most captivating opportunities anywhere within emerging markets in India and specifically, within financials where clear winners are emerging. That’s not just in terms of them gaining market share, but from the equity perspective as well.

You are part of the UK’s largest insurance group. What is your view on India’s insurance sector?
It's an area where some names have done well. There's cause for some excitement, but not all of it is justified. Some companies are slightly misunderstood.

So, should we treat this company as a savings business, as almost like a mutual fund or an AMC and asset management company? Or should we see it as an insurance company similar to what we see in a developed market -- where it's more about the protection business? And with that comes a different lens through which you need to look at those companies. Some of them are perhaps misunderstood.

Is there something that you like in the sector?
Outside life insurance, general insurance could be interesting. The penetration data there is much lower, particularly in the medical and auto areas. Autos regulation changed last year, which basically means that all new cars, whether that’s passenger vehicles or two wheelers, the penetration of insurance is going to be much, much higher than it has been previously.

Even without an increase in the auto sector volumes, auto insurance growth is going to be quite significant. If you look on the medical side, there is relatively low penetration versus how much of the Indian market is accounted for by out of pocket expenses.

As an investor, you've spent the last few years studying emerging markets. Do you think India will be the next China?
It's not going to be close. In fact, it’s going be completely different.

If you look at the way that the Chinese economy has matured over the last 20 years, what their business model has been and how they've achieved that, it's completely different to the path that India will follow.

(For) China, it's been driven from the top down. With every five-year plan, the government has set objectives on how fast they want the economy to grow, which sectors they want to allocate capital to, where they want the most investment to be, the infrastructure investments they want to make, where they want to grow their exports. It’s been more centrally controlled.

India is going to be more of a chaotic, democratic process. The winners are not just at the company level or at the sector level. They are not centrally picked.

In China, you need to understand how the government thinks about the property cycle before you begin investing in property. You need to understand: Is the government turning the taps on? Or are they turning them off? Do they want consolidation?

For India, yes, policies are important. But there’s more room for entrepreneurial dynamism. You’re going to see much more of a focus on disruptive business models, much less policy driven, and more company and management driven. That’s why we spend so much time understanding management, understanding their strategy, their alignment of interests.

ESG is an absolutely crucial part of this, and Aviva Investors is one of the leaders in the field in applying this kind of process. We have a world-class responsible investment team and the value they add to our process and our clients is only increasing. Over time, this is something the market is going to demand more and more from their asset managers, and this is somewhere we are definitely ahead of the curve.

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