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AIG bets big on Infrastructure: Investors do not miss this bus!
May 3, 2012

Mr Huzaifa Husain, Head -Equities of AIG Global Asset Management Company (India) Pvt Ltd speaks to Mr Debanjan Guha Thakurta, of, Indias leading mutual fund online service provider, to give his insight on current equity markets and on the infrastructure space. He speaks about the sectors that he is bullish on and which he thinks will outperform in future.

Author : iFAST Research and Content team

 What lags the infrastructure sector? – View on Equity Markets

Mr Huzaifa Husain, Head -Equities of AIG Global Asset Management Company (India) Pvt Ltd speaks to Mr Debanjan Guha Thakurta, of, India’s leading mutual fund online service provider, to give his insight on current equity markets and on the infrastructure space. He speaks about the sectors that he is bullish on and which he thinks will outperform in future.

Mr.Huzaifa Husain began the discussion by giving his outlook on the equity markets over a medium term. He was of the view that an equity market is basically a reflection of the economy and that it doesn’t have a life of its own; it only reflects what is happening in real life. He added that sometimes the markets show more optimism or pessimism than reality and these are usually referred to as an overvaluation and undervaluation. However, most of the time, markets typically show what is a fair view of the economy. In 2007 and in early 2008, there was an excess amount of optimism built into the markets, as a result of which they went up significantly. However, eventually they corrected and in the past four years, one of the reasons for this correction was the subprime crisis. Huzaifa believes that volatility is a part and parcel of the market and whatever happens in the economy, either on the domestic or global front, will immediately get captured in market movements.  

As far as the outlook on equity markets go, the fund house  believes that currently valuations are cheap and on the macro front, although the economic factors are not looking as rosy as they were in 2006-07, they are not very gloomy either. . The fund house normally tracks the Market Cap to GDP ratio, which is currently  giving positive signals in terms of pure valuations. Hence they advise investors who have a medium to long-term time horizon to start taking an exposure into equity markets, which in turn may yield a decent return in the future. However the fund house cautions investors that equity markets are extremely dangerous to predict with a fixed time frame.

Options to Invest

The fund manager then gave his views on how investors should build their equity portfolios. According to Huzaifa Husain, equity investing is about creating wealth and to do this, an investor needs to have a much longer time frame. Investors should not invest into equities thinking that that they can make money within specific time horizons. He opines that equity markets is likely to make money since economies are run by companies and if the investor is a part owner of these companies, then as a share holder he too may benefit. Hence investing into equities is basically like owning a part of these companies which themselves are the economy and this is how wealth is generated.

The fund manager believes that in order to ensure that it is not a conscious decision to invest every time; SIP is a much more sub-conscious way of investing, as it is a mechanical process. He is of the opinion that SIP is better than trying to purposefully time the market and by doing so, the investor tends to allocate a  decent amount of his current surplus over a period of time, which may enable him to generate wealth. Therefore, the fund manager recommends SIP as a better technique for simple retail investors and advises young investors to allocate a  portion of their earnings and also to ensure that the SIP amount is increased every year in line with inflation. The fund manager believes that all volatile phases are good breeding grounds for future returns just like all excess phases are good breeding grounds for losses.

Outlook on Infrastructure

Regarding his outlook on the infrastructure space, Huzaifa pointed out that this century began with investments in infrastructure, because India has historically been a consumption driven economy. Nearly two-thirds of the economy was driven by consumption and hence people would consume more and more. When consumption increases, the supply side has to keep pace with this, otherwise it will result in inflation.

The government realized at the turn of the century that inflation will always go up if infrastructure does not keep pace. The fund manager is of the view that the economy cannot grow in future without investments into the infrastructure space.

Bullish Sectors

The fund house is bullish on the following sectors within the infrastructure space:

  • Logistics Sector –This refers to companies related to roads, railways, construction activities, etc.

  • Corporate Capital Expenditure –This is increasing because  inflation is high and margins have also increased. However, there is demand which is showing a growth and along with this the consumption is also in the positive territory.. Rural India is, currently, on a consumption spree and in this scenario more and more corporates wants to set up factories and hence they have started investing. Today, when a corporate sets up a factory, it caters to demand either from the rural /urban/or even global front. Hence companies which can make engineering products for corporate capex also benefits.

  • Natural Gas –This is one fuel that is growing at a much faster pace compared to other fuel classes. This is because it is environment friendly and also India wants to diversify its risk from oil to natural gas. However, in the case of Natural Gas, infrastructure is not in place for example- there are only two operational ports to import LNG for the whole country and there is only limited pipeline. Hence there is a lot of infrastructure building that is happening in the natural gas sector. Here the fund house believes that there is scope not only for companies which makes pipelines but also for companies that makes equipments based on natural gas.

  • Resources – Companies which own resources like Coal, Iron ore, etc. tend to benefit as their prices are currently linked to the global markets and the fund house considers this to be a good area to take exposure in.

  • Transmission and Distribution – This sector looks interesting as some investments are happening and along with loss reduction.

Budget Overview

Finally, Huzaifa Husain concluded by giving us his views on Budget 2012. He is of the opinion that the budgets tries to disincentivize consumption by increasing taxes and incentivize savings by offering various such avenues like tax free interest of INR 10,000 on savings accounts, proposed Rajiv Gandhi Equity Scheme, etc. and to ensure that these savings are converted into investments, tax breaks have been proposed via accelerated depreciation.

Taking this discussion further, the fund manager added that in the Eleventh Five Year Plan, one third of the investments came from the private sector, while in the Twelfth Five Year Plan, half of the investments are expected from the private players. He believes that in order to attract private sector savings in the infra space, there needs to be some kind of stability in policy measures, e.g. structures like PPP (Public Private Partnership) ,wherein risks are lower. The fund manager is of the opines that if the government can set up mechanisms wherein the private sector  bring in capital, expertise and efficiency and if the remaining risks can be taken away from them, then  the speed of infrastructure creation may increase and the ability to attract capital from abroad may also improve. This in turn will benefit the infrastructure space in a big way in the long run.

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