India is well positioned to provide opportunities across various asset classes in the long term

Interview

In this exclusive interview with ‘India Global Business,’ Neeraj Seth, Managing Director and Head of Asian Credit, BlackRock, India discusses the factors driving the firm’s investment decisions in the Indian market, the prospects for India’s asset class in the next five years and the company’s commitment to sustainable investing.

How does BlackRock view India as a post-Covid investment destination?

When you think from a regional perspective, India is one of the important economies and this is something significant to focus on. When you think from a Covid-19 perspective, I don’t think we are at a post-Covid situation as yet. If anything, India is still in the midst of the spread of the virus and to some extent a number of the government policies, the overall health and safety lockdowns – fiscal and monetary- are still work in progress. I would say, at this point, we are looking at India very actively to update our longer term view with regards to growth, policy and the investment opportunities standpoint.

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When you look at India from a macro perspective, what are the factors that drive your investment decisions?

When we think of any geographical location, and certainly this is true for India as well, the key is to look at it through a combination of macro, top-down and bottom-up investment opportunities. From a top-down perspective, we look at a combination of political stability, macroeconomic stability and the broader policy mix that we would expect. Obviously, the different parts of it feed into different investment decision- making. In the case of India, specific decision making, and specifically post 2013 taper tantrum, we have seen a meaningful improvement in terms of the broader political and macroeconomic and policy mix. To a certain extent we’ve also seen some reforms which are important from a forward-looking perspective such as GST and the Insolvency and Bankruptcy Code (IBC). We are, therefore, looking at these closely in terms of forming our view as we go forward from an investment perspective. In terms of the credit investment part of my responsibility in the region, and I also oversee that for our India part of the portfolio, the bottom-up opportunity assessment, in terms of the credit risk, is very important. We have seen some improvement over the course of the last few years – the overall shift from the IBC perspective. So, it’s an area we are still closely monitoring. We do have meaningful exposure today and we continue to use the opportunity to grow our exposure in the country.

What are some of the Indian sectors BlackRock is currently looking at from an investment point of view?

We are sector agnostic. There are two important lenses here that we would think about. First, is the longer term impact of Covid-19 and how that plays out in certain sectors, which actually guides your thought process and decision making in terms of how do you gain exposure in the sectors, where you see a benefit of the new normal post-Covid,  and which are the sectors that have longer-term negative impact. So, we don’t necessarily have a sector tilt or a specific sector which we would not look at, but certainly, I think there’s an important lens from the Covid perspective that we are updating as we talk.

The second aspect is more from a sustainability and ESG perspective which is also becoming more and more important for our global platform. We do have certain exclusions, more specifically, sectors like thermal coal, we did make a conscious choice from a global platform perspective to have that as an exclusion. So, there is an additional filter from an investment lens that you’re looking at that you think about the different sectors. For us, the key is the investment opportunities and the risk adjustable returns are the critical aspects of decision-making in investment.

How do you think sustainable investing will evolve over the years ahead and what do you think is important to the clients in this area?

I feel that the pandemic itself might even accelerate the trend that we are observing across the globe in terms of sustainability. From a client’s perspective it is responsible investing, whether you define that in terms of your ESG framework, thinking of sustainability in terms of the environment, society and local communities. But at the same time, if you take a longer term view and if we think about some of the shifts that are happening in the industry, I think it’s extremely important for emerging countries like India, where there is an opportunity to leapfrog some of the old technologies and older ways of doing business, tomove towards a more sustainable way of doing business. It is important because in the longer term, I do think, as more and more clients start to looking into it, as more of the global allocators start to look into the concept of sustainability it will start to change the flow of capital as well as the risk premium. In the end it gives you a very clear rationale to look at it from a returns perspective. So, if you change the risk premium in any sector or the flow of capital it obviously has an implication in terms of the profitability of the business. Right now, obviously it’s still early days and early stages for the concept for Asia but if you take a longer term view I think there will be a significant shift in terms of how the world looks at the allocation of capital, the flow of capital in certain industries and how you price risk in those industries. And as I said for emerging countries, from a longer-term standpoint there is an opportunity in certain industries to leapfrog. I think it’s all the more reason to look at it.

How do you see  the prospects for  India’s asset class in the next five years?

The story of India is built on a potential high growth rate in the future which is driven by a combination of political and macroeconomic stability and demographics. There are still some parts of that one would expect to see more of, such as structural reforms, ease of doing business, governance aspect. I think that’s going to be important. I am hoping to see more of these reforms. I think India is positioned well from a longer term perspective to be a country the actually provides opportunities across various asset classes. Let’s go a little bit more in detail, thinking about the broader longer-term policy making, the structural reforms and the infrastructure build in the country that should help in terms of systematically and structurally lowering the inflation and over time lowering the cost of capital. So, if you think from a rates perspective and the monetary policy the RBI moved towards the inflation targeting framework a few years back – if structurally the inflation can come down it can bring rates lower, if the corporate governance can keep improving it can bring risk premiums lower and hence you can see opportunities across the government bond and the corporate credit sectors. If the country is able to provide and generate a stable higher growth rate it obviously also gives an opportunity of translating that in terms of better return on capital, higher equity returns over time and lastly, a lot of it is underpinned by a macroeconomic stability which is through a combination of domestic fiscal consolidation as well as a more stable balance of payments leading to a more stable currency from a global perspective. The opportunities are in front of us, which is quite attractive. The world that we live in will be very different post-Covid, it will be a world with a lot more debt but a lot of lower yielding debt, lot of negative impacts from a growth perspective. So, if a country can provide longer term stable growth in this scenario, I do think it bodes well for a lot of different asset classes from an investment perspective.

What are your thoughts on the flurry of investment and FDI inflows especially into the Indian tech sector? How should one view this? With cautious optimism or a pinch of salt?

I would take a balanced view. On the positive side it is important to highlight that technology underpins a lot of the value creation, wealth generation and development. In my mind, that’s something unambiguous. Technology is critical for commerce, business, growth and even national security for that matter. India is actually benefiting in terms of having a good ecosystem, domestic infrastructure and having the ability to attract foreign capital. I do think that more investments bring further strength to the existing ecosystem and infrastructure in the country. On the other hand, I also want to highlight that technology is not actually the source of the biggest job creation. It has a positive impact on the services sector, sure, but India has a very strong demographic dividend. The question still remains, if we look at the next ten years, what exactly does the government need to focus on and what can they do in terms of structural reforms to create job opportunities for the country’s demographic dividend. As in the absence of job growth you get the other side of the coin which is having a large young population and a low level of employment causing social issues. So, as I said, it should be a balanced view. The technology sector and the FDI it is attracting is a positive but there is a lot more that has to be done in order to generate employment for the country to be on a sustainable growth trajectory.