State-owned companies in India are currently unattractive but will prove a more enticing bet if Prime Minister Narendra Modi enacts more dynamic economic reforms.
That's the view of Citywire AA-rated Prashant Khemka, who is chief investment officer for emerging markets at Goldman Sachs Asset Management.
Speaking to Citywire Global, Khemka said efforts to improve autonomy among government-owned and public companies should be welcomed by investors.
‘While we generally have difficulty in finding many attractive opportunities amongst government owned entities, we do have selective investments in such companies in several emerging markets countries, including in India.'
'Modi is likely to provide greater autonomy to them, that is why we have increased our exposure to public sector companies in India.'
Khemka added that confidence levels in the Indian market have significantly improved over the past 12 months. He is trying to build on this renewed confidence in his fund, the Goldman Sachs India Equity Portfolio fund.
Realism and relevance
He said expectations around reform and growth are realistic, however, full-blown revival efforts are arguably at an early stage.
‘Corporate earnings growth in India had slowed down significantly over the last three years, especially for those with domestic exposure. Investors were tired and the entire market was very sceptical a year ago.'
'However, we expect the next three to five years to be much better and the earnings to return back to normal trajectory. We are still in the early stages of such revival,’ said Khemka.
In terms of sectors, the Goldman Sachs India Equity Portfolio fund has a 23.4% exposure in financials but Khemka stressed this is made up of a number of diverse businesses and sub-sectors, not just banks.
‘We have an overweight in financials in India, since we see good opportunities in a number of businesses such as private banks and real estate companies, for example. Especially real estate has been very attractive from stock selection perspective for us’
‘Even though the real estate sector isn’t what it used to be back in 2007, it still has opportunities from a stock-picking perspective. Some of the valuations of companies are good and even though we do share some of the concerns regarding this area, we have been able to be successful in it.’
Less cautious on EMs
‘Until June of this year, we had been more cautious in emerging markets, relative to developed markets. In June we changed that view to a more neutral perspective,’ said Khemka.
Over the past three years, until the end of August 2014, the Goldman Sachs India Equity Base Acc USD returned 43.55% in euro terms. Its benchmark, the CNX Nifty TR, rose 25.28% over the same period, also in euro terms.