Photographer: Dhiraj Singh/Bloomberg

'One-Trick Pony' India Is Worth the Investment Risk for Nomura

  • Consumption underpinning growth as core sectors lag: Mehta
  • Capital spending must revive to sustain stocks rally

Nomura Asset Management says India’s stock market is overcrowded and its economy, Asia’s third biggest, is hobbled by a drop in infrastructure investment. Yet, the money manager can’t stop buying the nation’s shares.

Companies such as private insurers and diagnostic firms offer opportunities for investors chasing businesses that are riding the services boom, said Vipul Mehta, who this year has returned 32 percent to beat 98 percent of peers with the Dublin-traded India Equity Fund.

Mehta, the head of investment for Asian equities outside of Japan, said capital spending must increase to sustain growth in one of the world’s fastest-growing big economies, else the nation risks remaining a “one-trick pony” driven solely by consumption. A gauge of companies making consumer appliances has surged 41 percent since Jan. 1, three times as fast as the S&P BSE Sensex.

Nomura’s assets in India have tripled to $3 billion in two years, handing investors across its multiple funds a 40 percent gain in the year ended March, versus an 18 percent jump in the benchmark MSCI India Index, Mehta said. Here are the highlights from his interview with Bloomberg News in London.

India’s growth potential has been obvious for years. What’s new?

“The more important part is the depth of companies and the number of opportunities. India keeps going along in a very narrow range but it is also resilient on the way down. It is a stable, consumption-driven economy. Growth won’t fall below a certain level.”

Isn’t India an overcrowded market?

“India has been an overcrowded trade for very long. It’s not so simple in terms of everyone going there and getting a free ride. Within the country there are sectors which do well and those that don’t. It’s all about companies that capture those opportunities.”

What are those opportunities exactly?

“The thing that’s making fund managers like India is the emergence of new businesses and sectors. Private-sector insurers are getting listed. Earlier, they were valued as a sum of parts in a bank’s valuation. Pathology and diagnostics companies are getting listed.”

Aren’t such companies trading at pricey valuations?

“We don’t look at the overall market valuation because that’s an aggregation of sector price-to-earnings ratios. If companies are delivering with an enormous amount of consistency, if they are able to generate super-normal returns, then you pay for it.”

That hasn’t prevented such stocks from falling in the past.

“We are not saying that things aren’t going to be challenging. The current environment is reasonably challenging. We’ve got no capital expenditure. India is a consumption-driven economy, a one-trick pony. We own little of industrials, capex-dependent companies and even information technology and health-care stocks.”

What will it take to kick-start infrastructure spending?

“Faster and sensible decision-making by the bureaucracy. The affordable housing that has been initiated could be a game changer. Whether it will happen or not I don’t know. There have been many a slip between the cup and the lip in India, but if there’s one top-down story I would like to believe in, it is affordable housing.”

Read: $1.3 Trillion Housing Boom Set to Be India’s Next Growth Driver

What are the key risks to your strategy?

“There’s the key-man risk with Prime Minister Narendra Modi. There are also risks like valuation and fund flows. India is in the middle of a great run. It is as if the market can do no wrong. We’ve got to look out for warning signs. Externally, if the Fed raises rates four or five times or if oil goes past $100, emerging markets and currencies will go for a toss.”

How do you think Modi is running the government?

“He’s doing a fair job. All of us were guilty of thinking he has a magic wand with which he would solve every problem India has and transform it into a first-world country overnight. Even the government underestimated the problems. They have taken much longer than one would have thought to get their act together.”

Read: Modi’s Misguided Economics Will Catch Up to Him, by Mihir Sharma

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