Investing in Global Growth

After the success of their US offerings, AMCs are coming out with funds that will invest in Europe and Japan.
Shoaib Zaman/Money Today        Print Edition: January 2014

Indian markets saw the launch of six global funds between January 2012 and December this year. Of these, five are US-focussed, while one seeks to invest across the globe.

Now, a new trend seems to be emerging. Asset management companies, or AMCs, buoyed by returns from their US funds, are filing applications for funds that will invest in Japan and Europe.

The argument in favour of these funds is that they will allow investors to diversify globally. "As investors start to build portfolios that are more diversified, it will be prudent to look at a combination of emerging market and developed market funds," says Vishal Dhawan, director, Ahead Wealth Advisors.

Out of 33 global funds that Indians can invest in, 12 are thematic and focus on real estate, commodities, agriculture, etc, while 16 invest in specific countries such as Brazil, China and the US or regions like the Asean and Latin America. Some invest on the basis of the economy's development stage (one example of this is emerging-market funds). Only five are truly global, with mandate to invest across the world.


Out of these, DWS Global Thematic Offshore has the highest exposure to Europe (36%). But it has no exposure to Japan.

The highest exposure to Japan is of ICICI Pru Global Stable Equity (Feeder fund - Nordea-1 Global Stable Equity Fund Unhedged) with 9% allocation; the fund's Europe exposure is 24%. Other global funds have less than 20% exposure to Europe and less than 5% to Japan (in some cases nil).

Judging by these launches, it seems that fund houses are betting on an early global recovery. The November report of the global investment committee of Morgan Stanley, for instance, has assigned an 'overweight' rating to international equities. "We increased our exposure to Japan and Europe in March and September. Meaningful political change has taken place in Japan, providing a strong tailwind to equity prices. Also, growth is improving in Europe, which should lead to acceleration in earnings and better stock performance," it says.

There is a significant case for funds focussed on Japan and Europe considering the positive forecasts about their economies by industry veterans.

JP Morgan AMC has filed an application for a Europe-focussed feeder fund. Nandkumar Surti, managing director & CEO, JP Morgan Asset Management, explains. "While there are some structural issues in peripheral Europe, we believe there are a few developed economies where the market has bottomed out, is attractively valued and sentiment in turning positive."

Surti says economic growth in developed markets of Europe is rebounding and unemployment is falling. Plus, the corporate sector of these economies will gain from loose credit conditions and recovery in US and emerging markets.

Among the current offerings, JP Morgan AMC has one global fund with some focus on emerging Europe - JP Morgan Emerging Europe, Middle East and Africa (EMEA) Equity Offshore. "The Europe-focused feeder fund will largely invest in developed European countries like Germany, France and the UK. This differentiates it from our JP Morgan EMEA Offshore fund, which has allocation to emerging European countries as well," says Surti.


Market watchers say there is a lot of interest in global funds because of the returns they have been generating of date. The top three performing funds -- FT India Feeder Franklin US Opp, ICICI Pru US Bluechip Equity and Motilal Oswal MOSt Shares NASDAQ-100 ETF-have returned around 50% over the last one year (till 15 November 2013).

The two main reasons for such high returns are depreciating rupee and green shoots of recovery in developed countries. Between January 1 and December 5, the Nasdaq rose 29.5% while the Nikkei 225 shot up by around 45%; the Sensex returned just 8% during the period.

"Considering that long-term currency movements are highly influenced by inflation differential between countries and India continues to have significantly higher inflation than the rest of the world, there is a possibility that the Indian currency will continue to depreciate," says Dhavan.

"We recommend these funds not due to currency depreciation but their fundamentals and growth prospects," says JP Morgan's Surti. He says these funds will reduce portfolio volatility through diversification. "As highlighted earlier, our theme for the next year is re-coupling to developed markets and rerisking the portfolio for a healthier global economy," says Surti.

But there are some people who say that Japanese and European markets are well-developed and will, hence, give lower returns in the long term than an emerging market like India. Therefore, just a part of the portfolio, up to 20%, should comprise international funds. But there are people who are a lot optimist than this.

In a recent Morgan Stanley report, commodities investor Jim Rogers said that "I sold all my assets in Japan, but I'm starting to look again. I think I sold too soon. That market is still down 60-70% from its all-time high." But he added: "My view is that we'll look back in 20 years and say the final deathblow for Japan was [Prime Minister Shinzo] Abe and his policies." Printing money to bring inflation and revive the economy may work in the short term, but these measures will not resolve Japan's structural problem, that will come back to haunt it in worse ways, he said. Japan has recently announced a series of measures to increase inflation and end the recession.

One of the steps involves NISA, a preferential tax system based on the United Kingdom's 'individual savings account', under which gains from investments in listed securities and publicly offered equity investment trusts are not taxable.


EUROPE

After six consecutive quarters of stagnation or contraction, the EU reported growth in the second quarter of 2013.

Explaining the bullishness over Europe, Tai Hui, managing director, Chief Market Strategist Asia for JP Morgan Funds, says, "Core Europe is still likely to be leading growth in absolute terms but we can see that the peripheral Europe is bottoming out and should return to growth in coming quarters. Emerging Europe may post more impressive gains at times but will also be more volatile."

The opportunities are not without risks. "There are still many structural issues, job market, banking union and recapitalisation and fiscal reforms, that Europe will need to work through in the coming years, and these are challenging tasks," says Hui.

On November 5, the European Commission published its economic forecast for the 28 member states. "Reflecting the carry-over from the weakness of economic activity last winter, GDP in annual terms is expected to remain unchanged in the EU and contract by 0.5% in the euro area in 2013," it said. The projections for 2014 are-economic activity will expand by 1.5% in the EU and 1% in the euro area before accelerating to 2% and 1.75%, respectively, in 2015.

JAPAN

Prime Minister Shinzo Abe has launched a plan to end Japan's two-decade-old deflation. One of the pillars of the plan is encouraging citizens to invest in riskier assets, including Japanese stocks and overseas mutual funds, through the tax-free Nippon Individual Savings Account (NISA). The scheme will provide a five-year tax holiday on dividends and capital gains provided the money is invested in stocks, mutual funds or exchange-traded funds. The account-holders will be able to claim around $10,000 tax-free investments in the stock market. The programme is to be launched in January 2014.

With Nikkei already up 40% this year, is there room for a further rise? To this, Hui says that Japanese consumers and companies have reacted favourably to the early stages of the programme. "We believe we could need more catalysts from Japanese policy makers to excite the market," says Hui.


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