Leading Indian equity manager: why I’m staying defensive

The top performing manager in Indian equities is sticking to his defensive stance in 2012 as he fears the risks outweigh potential rewards in the emerging market.

Speaking to Citywire, David Gait, manager of the two First State Indian Subcontinent funds, said risk aversion, anti-corruption protests and rising inflation had undermined the Indian market in 2011 making for a very difficult year.

‘Company valuations have come down but in many cases, the risks still outweigh the potential rewards and we therefore maintain a defensive bias,’ he said.

‘Due to the lack of transparency in the government, we remain particularly wary towards companies which depend or thrive on dealing with the authorities.’

In particular, Gait said he expects inflation to be a lingering problem for the nation in the coming year despite moves by the Reserve Bank of India to tackle this issue.

‘Once the inflation genie is out of the bottle it is very difficult to control it. The Indian central bank has been unable to stop the party in time.’

‘They are making all the noises right now but it could be a case of too much too late. Rates have to rise further before they start dampening wage expectations.’

Portfolios

In terms of portfolio positioning, in both the UK-domiciled First State Indian Subcontinent GBP, which is registered for sale in seven European countries, and the Dublin-domiciled fund First State Indian Subcontinent I, he has taken overweight positions in consumer staples, materials and industrials.

This is while adopting large underweights in energy and financials. In financials, for example, he is currently 18.8% below the benchmark allocation in the OEIC fund and 18.9% below the benchmark in the Dublin-domiciled fund.

‘Some of these [state-owned] banks have serious asset quality issues and will be exposed if there is a meaningful slowdown in loan growth,’ said Gait. ‘The valuations may be appealing for a short term trader, unfortunately, we are not good at timing and find the structural risks prohibitive.’

Gait said his holdings in this space were reserved for private banks, which he believes have quality management and sound governance.

Outlook

Discussing his outlook for the region, Gait said corruption concerns had weighed heavily on investors but not all Indian companies should be tarred with the same brush.