‘29% of the GDP will come from exports’

What is your medium-term outlook on equity markets?

As a fund house, we believe that it is a misunderstanding that the markets are expensive. People are worried about mid and small cap in particular. But for us, the most important parameter over medium term is business growth of the company and the industry. Luckily, the Indian economy is expected to deliver a 7% real GDP growth this year and this trend is expected to continue growing forward. Research also shows that business earnings are expected to grow at 13-15%. Historically market returns have shown strong correlation with underlying business earnings momentum, and if same continues than strong fundamental delivery at business level can lead market performance.  As long as the fundamentals are in place and the businesses are doing well, we can expect similar returns over long run.

HSBC Mutual Fund has launched HSBC India Export Opportunities Fund. What’s the rationale and what opportunities do you see in this space?

During our research, we found that the commentary coming from the industries focused on exports and also the World Bank data is that the worst has already Been discounted given developed nations struggle to show growth momentum post covid.   Corporates have started to sound optimistic. Developed economies are expected to come out of the recessionary trends by next year. So, we believe this is the time where there could be opportunity for a turnaround in the world trade.

Also, the Govt. of India has taken a decisive step to take India’s export basket which is currently at 22% of the GDP at $783 billion to $2 trillion by the end of this decade. This would mean about 29% of the GDP will come from exports. The underlying economy is expected to grow at 10-11% in nominal GDP growth while the exports are expected to grow by 14-15%.

So, we rely on these factors and we also found that there are enough investible names to be a part of this portfolio and hence, we launched this strategy.      

What are the key risks associated with the export-oriented sectors and how do you plan to mitigate external risks, which are associated with the sectors like strengthening of rupee?

All equity investments come with a share of execution risk. If India has to achieve the exports of $2 trillion, how the execution plays out in the next 5-7 years is something which has to be monitored. Secondly, given the uncertain geopolitical situation, the world has to learnt to live with these disturbances but if these disturbances escalate then given this fund’s exposure to global economies, it will have an incremental risk compared to any other diversified strategy. 

Having said that, we are trying to minimize the risk. Although the criteria to qualify to be part of this portfolio (at least 80% portfolio exposure) is minimum 20% revenue through exports, we found that stocks in the investment universe have on an average 40-45% revenue from exports, this means that 55-60% of revenue is also coming from domestic markets. So, the portfolio will have a good blend of domestic + exports.

Also, there are 12-15 sectors in the investment universe like textile, pharma, technology, chemical, auto ancillary exports, capital goods exports etc. So, through diversification across sectors, geography and revenue, we believe we will be able to overcome the uncertainties that may crop up during the execution of our strategy.

When it comes strengthening of rupee, we believe the currency status to remain status quo. Indian rupee has depreciated on an average 2-3% annually in the last 20-25 years. RBI has called India’s inflation comfort zone to be at around 4%, which is about 2% for most of the developed economies. So, as long as this inflation differential stays, Indian currency should continue to depreciate. Our view is that currency will not appreciate over the medium to long term due to the inflation differential. So, we are not really worried about the strengthening of the rupee.       

*refer SID for more details.

Most defensive sectors like pharma and IT are considered export-oriented companies. So, how much exposure will you give to these two sectors and how will diversify investment portfolio beyond these two sectors?

The two filters we used for stock selection are at least 20% revenue coming through exports and at least Rs. 2000 crore market cap. We have about 300 stocks in this investment universe. It is so vast that it is easy to create a well-diversified portfolio with 40-50 stocks. This universe will continue to expand with growth in Indian exports.

No sector in our portfolio will have over 20-22% representation in the portfolio. There will be 4-5 sectors which have over 10% representation. The portfolio will have 8-12 sectors at any time so there is no specific concentration risk in this portfolio.

How will the recent geopolitical events affect the India’s export ambitions?

We see the current geopolitical scenario as an opportunity in disguise. The whole trade dynamic in the world has changed post COVID-19. There are issues related to sovereign security  of importing countries. The world wants to have an alternate supplier that offers the triple benefits of size, scale and skill and India stands out on these parameters. India’s geopolitical standing with the rest of the world is the best now than it has been in the last 20-25 years. So, the current geopolitics will open more doors for us.

Why should MFDs look at offering HSBC India Export Opportunities Fund to their clients?

This fund is an umbrella product and is a diversified strategy with multiple sectors as its components. It has 300 stocks in the initial investment universe and 8-12 sectors. It will give strong large cap, mid and small cap exposure. It will be run on an ethos of a multi-cap strategy with a basket of large cap at 50% and mid and small cap at 50% with a leeway of 5-10% on either side. This fund will give exposure to a faster growth engine of the economy versus the overall economy, true benefits of diversification. Also, companies heavily invested in exports have more regulatory compliances vetted by governments of India and the importing countries. So, they also offer the quality parameter. So, these benefits make this fund a good choice to be pitched against a flexi cap or a multi-cap fund.  

The NFO for HSBC India Export Opportunities Fund has opened on Sept 5 and closes on Sept 19.