Q. You have been in India for some time to promote the Europe fund. What is your view on Indian Investors?
A. I've seen huge interest (for European equities) here. The reason is the 25% gain by European markets in 2013 (based on MSCI Europe Index). I know the experience of (investing in) international equity markets is relatively new in India, but I was surprised by the amount of information Indian investors are starting with. They say they don't know much about European equity markets, but when you chat with them, you realise they know much more than you would expect of someone with no experience in European equity. Europe has structural issues. Everyone knows of Europe as a holiday destination, the riots in Europe and they are aware of the bad press surrounding the Euro. These are some of the clichs about Europe. But, if people do their homework, which Indian investors have, they will find that growth is returning. A lot of questions are centred on the fact that Europe will grow at 1-1.5% next year. (But,) Indian investors have been asking why they should bother about Europe growing at 1-1.5%, when their own economy is growing at 4.5-5%.
Q. The US equity market created a similar buzz in 2012-13. Investors had a good experience with US equities. In terms of growth for equity investors, how are the two economies, Europe and the US, placed?
A. The two economies are different. The two are experiencing different growth in absolute terms, but have a similar (growth) trajectory. What is really interesting is not that Europe is growing at 1.5%, but that it has gone from -1.5% to 1.5%. It is that delta (the rate of change of growth) that is interesting. The US has been through a similar experience. But I would say that where Europe is today, the US was a few years ago.
Europe gained 25% last year. We know last year was not the year of GDP growth in Europe. If you take the aggregate of companies, EPS (earnings per share) growth in Europe is roughly between 0 and -1. So, the 25% return was the result of re-rating. When you look at the PE (price-to-earnings) multiple, (EPS has not grown but the price has gone up), anything that was trading at 6 times PE is trading at 8 times and anything that was trading at 8 times is trading at 10 times PE ratio.
Why we're entering Europe right now is because of the pace of growth. In 2014, economists are predicting GDP to grow at 1.5% and, because of this, EPS is likely to grow at 15%. Re-rating has already happened in the US. The US is probably showing us what's going to happen in Europe. Indian investors with experience with the US market can use this as a guide on how 2014 will be for European markets.
Q. What is your forecast for European markets after 2014? How long will this growth continue?
A. It's extremely hard to forecast what's going to happen over 12 months, and when it comes to forecasting for the long term, the accuracy is even lower. We don't really know what will happen in 2015 and 2016. This is why investors should look to pick stocks. This will not only serve them in this period (2014), but also in a period when the world is changing. We want investors to also gain in the medium and long terms. So, we don't limit investors to one strategy. If the value strategy that worked last year is not the winning strategy for 2014, then we want investors to gain from the other two engines of alpha (apart from value)- earnings momentum and quality. We want investors to be exposed to all three factors.
Q. We talked about the opportunities in Europe vis--vis the US. Equity analysts are also forecasting good times for Indian equities. How difficult would it be for you to convince Indian investors to invest in Europe at a time when domestic equities are poised for an upside?
A. I can only go by what I have seen during my trip because I am not an expert on Indian equities. There are some interesting data points that I have observed. The first, people who lost heavily in Indian equities are licking their wounds, and are not thinking of going back to equities. The second, Indian equities are very volatile. Our data shows that Indian equities are either at the top or at the bottom in comparison with global equities and never in the middle. The returns are never around the average, it is always extreme.
So, I do appreciate the concerns investors have about equities. Having burnt their fingers in the domestic market, they would be scared of entering a market (Europe) they hardly know. But, an investor's talent is in detaching from emotions and (being able to) look at facts. Europe is one of the least volatile markets in the world and a lot less volatile than Indian equities. Indian markets and European markets have a low correlation and, thereby, investing in Europe is diversification (of equity investments) and you are reducing risk.
Q. Will the growth in Europe be broad-based or in patches?
A. Growth will be experienced differently in different parts of Europe. There are regions that have seen negative growth and will go from negative to positive and there are regions that suffered a lot less in terms of economic growth. The direction of change of GDP numbers will be different for different countries.
Remember, the economy is not the market and the market is not the stock. Just because an economy does not grow very fast in terms of GDP, it does not mean you will not invest in the country's stock market. For instance, if we compare the UK stock market with the rest of Europe, stock performance in the UK is subpar. The reason is that the UK benchmark is heavily tilted towards the mining sector. So, while Europe is recovering, the mining sector lags and (UK's) EPS growth will not be particularly attractive. But, this does not mean there are no investment opportunities in the UK.
Q. What are your investment strategies?
A. Our focus is on three factors- value, momentum and quality. We believe, and we can prove this with back-testing, that quality companies that are attractively valued and have better momentum than the market will outperform. So, our strategy is to be exposed to a portfolio that offers all three characteristics at the same time. Basically, our portfolio looks like a super stock with quality, has better momentum and is cheaper than the market.
Q. What can we expect from your fund in 2014?
A. The fund (JP Morgan Europe Dynamic Offshore) targets high excess returns. It does not track the benchmark very closely, and we target five percentage points higher than what the market is expected to return. So, some valuation models (based on dividend yields) are forecasting a double-digit return for markets next year and we are targeting five percentage points higher.
Q. Tell us about the portfolio of the fund
A. The portfolio for Indian investors will be completely agnostic to benchmark. It is not guided by any benchmark, country or sector. The composition of the portfolio and country and sector breakdown will depend entirely on stock picking and a bottom-up approach that we have adopted. We try to identify stocks based on value, quality and momentum. At present, the sectors we like most are in the cyclical category.
