Two new reasons to be selective in India equities

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This is a sponsored article from PineBridge Investments.

Over the past several months, we have witnessed two interesting phenomena in India. The first is the dichotomy between India’s macro and micro signals. The second is the outsize role of a few stocks in driving the stock market. Both offer insights into why selectivity is essential when investing in India’s equity market.

Macro and micro signals are disconnected

In recent years, India has enjoyed good macro conditions primarily led by subdued inflation, lower interest rates and commodity prices (especially for crude oil), a manageable current account, and an appreciating currency. Despite the positive macro backdrop, the micro – or the health of many Indian companies – left room for improvement, with many companies suffering from high leverage and low demand for their products. Challenging micro aside, the equity market – represented by the MSCI India Index – rose nearly 39% in 2017. This surge was largely fuelled by domestic as well as foreign flows chasing good macro but ignoring the deteriorating microenvironment.

Fast forward to 2018, and the dichotomy between macro and micro remains, but we are seeing a shift. The good macro story has deteriorated, while the microenvironment has improved considerably. Indian companies are moving forward and demand is coming back.

Below are some of the positive trends we are identifying on the ground:

  • Domestic fixed asset investments have risen steadily since mid-2017.
  • Capacity utilisation and industrial production have rebounded.
  • The infrastructure sector is experiencing unprecedented demand.
  • Bankruptcy proceedings are progressing.

At PineBridge, our investment strategy focuses on bottom-up stock picking. In an emerging market like India where risks are galore, a deep understanding of the businesses at the microscopic level helps considerably. The strength of the business model, the people running the business, and the valuation to be paid are the three most important criteria we evaluate. This does not mean, however, that we completely ignore macro trends, as we are acutely aware of important economic developments.

Our portfolio comprises companies we believe are fairly valued and likely to benefit from the recovery in domestic investment. All our companies in this space are net cash, so they should be insulated from rising local interest rates.

In terms of sectors, we are overweight exporters — such as IT and pharmaceutical companies — that are benefiting from global demand and a depreciating local currency. We have reduced our exposure to defensive sectors, such as consumer, because we view their valuations as expensive and think these companies may not be able to capture the upside in the economy.

We believe our approach to carefully select companies in this shifting landscape will allow investors to capture opportunities. More importantly, this time-tested approach, honed across multiple market cycles, serves as a built-in risk management system to mitigate the risk of permanent loss of capital for our investors.

Learn more about PineBridge’s India equity strategy at pinebridge.com.*

*In Hong Kong, the website www.pinebridge.com has not been reviewed by the Securities and Futures Commission (“SFC”) and may contain information of funds not authorised by the SFC. In Singapore, the website www.pinebridge.com (including any contents therein) have not been reviewed or endorsed by the MAS.

Potential investors should consider the following key risks before investing in any of the Strategies mentioned:

Market Volatility Risk: All types of investments and all markets are subject to market volatility based on prevailing economic conditions. Price trends are determined mainly by financial market trends and by the economic development of the issuers, who are themselves affected by the overall situation of the global economy and by the economic and political conditions prevailing in each country. As securities may fluctuate in price, the value of your investment may go up and down.

Investment Loss Risk: Investments may decline in value and investors should be prepared to sustain a total loss of their investment.

FDI Risk: The prices of FDI can be highly volatile. In addition, the use of FDI also involves certain special risks depending on the type of FDI, including but not limited to correlation risk, counterparty credit risk, legal risk, settlement risk, margin risk, as well as other possible risks that may arise.

Equity Risk: The value of shares and securities related to shares may fall due to issuer related issues, financial market dynamics and world events including economic and political changes.

Country Concentration Risk: A concentrated investment strategy in equity and equity-related securities of companies related to the economic development and growth of India may be subject to a greater degree of volatility and risk than a portfolio which is diversified across different geographic regions.

Emerging Market Risk: Emerging markets are typically smaller, less transparent and subject to evolving, less stable political and regulatory regimes.

All investments are subject to regional, industry, market, political, regulatory, competitive, business, financial, and other risks. The risk factors described should not be considered an exhaustive list of risks, which potential investors should consider before investing in the strategy. All investment decisions should be made based on an independent evaluation in consultation with financial and legal advisors.

The source of the information in this document is from Asia Equities team of PineBridge Investments Asia Limited unless otherwise specified.

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PineBridge Investments is a group of international companies that provides investment advice and markets asset management products and services to clients around the world. PineBridge Investments is a registered trademark proprietary to PineBridge Investments IP Holding Company Limited.

For purposes of complying with the Global Investment Performance Standards (GIPS®), the firm is defined as PineBridge Investments Global. Under the firm definition for the purposes of GIPS, PineBridge Investments Global excludes some alternative asset groups and regional legal entities that may be represented in this presentation, such as the assets of PineBridge Investments.

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Opinions: Any opinions expressed in this document represent the views of the manager, are valid only as of 10 August 2018, and are subject to change without notice. There can be no guarantee that any of the opinions expressed in this document or any underlying position will be maintained at the time of this presentation or thereafter. We are not soliciting or recommending any action based on this material.

Risk Warning: All investments involve risk, including possible loss of principal. Past performance is not indicative of future results. If applicable, the offering document should be read for further details including the risk factors. Our investment management services relate to a variety of investments, each of which can fluctuate in value. The investment risks vary between different types of instruments. For example, for investments involving exposure to a currency other than that in which the portfolio is denominated, changes in the rate of exchange may cause the value of investments, and consequently the value of the portfolio, to go up or down. In the case of a higher volatility portfolio, the loss on realization or cancellation may be very high (including total loss of investment), as the value of such an investment may fall suddenly and substantially. In making an investment decision, prospective investors must rely on their own examination of the merits and risks involved.

Performance Notes: Past performance is not indicative of future results. There can be no assurance that any investment objective will be met. PineBridge Investments often uses benchmarks for the purpose of comparison of results. Benchmarks are used for illustrative purposes only, and any such references should not be understood to mean there would necessarily be a correlation between investment returns of any investment and any benchmark. Any referenced benchmark does not reflect fees and expenses associated with the active management of an investment. PineBridge Investments may, from time to time, show the efficacy of its strategies or communicate general industry views via modeling. Such methods are intended to show only an expected range of possible investment outcomes, and should not be viewed as a guide to future performance. There is no assurance that any returns can be achieved, that the strategy will be successful or profitable for any investor, or that any industry views will come to pass. Actual investors may experience different results.

Information is unaudited unless otherwise indicated, and any information from third-party sources is believed to be reliable, but PineBridge Investments cannot guarantee its accuracy or completeness.

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In Australia, PineBridge Investments LLC is exempt from the requirement to hold an Australian financial services license under the Corporations Act 2001 (Cth) in respect of the financial services it provides to wholesale clients, and is not licensed to provide financial services to individual investors or retail clients. Nothing herein constitutes an offer or solicitation to anyone in or outside Australia where such offer or solicitation is not authorised or to whom it is unlawful. This information is not directed to any person to whom its publication or availability is restricted.

In Hong Kong, the issuer of this document is PineBridge Investments Asia Limited, licensed and regulated by the Securities and Futures Commission (SFC). This document has not been reviewed by the SFC.

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PineBridge Investments Singapore Limited (Company Reg. No. 199602054E) is licensed and regulated by the Monetary Authority of Singapore (MAS). In Singapore, this material may not be suitable to a retail investor and is not reviewed or endorsed by the MAS.

This is a sponsored article from PineBridge Investments.

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