Emma Wall, senior editor for Morningstar.co.uk spoke to Jonathan Schiessl, portfolio manager of the Ashburton India Equity Opportunities Fund.
A couple of years ago, everybody was picking India as their top market, the one to watch and that's because there had been seismic political change. However, it hasn't been subsequently done very well after an initial rally, has it?
Yeah. So, I think clearly expectations are very high. Modi comes into power and everybody is expecting things to be changed in an instant. Clearly that didn't happen. He's been putting a lot of building blocks in place, a lot of reforms in place that typically take a little bit of time before they start materializing.
The reality is that he came to power three years ago. India did well that year and then after that you saw quite a switch in emerging markets away from the likes of commodity consumers like India into some of the more beaten up emerging markets like Russia, Brazil, the commodity producers.
As we saw the rise in commodity prices over the last year, year and half, they outperformed and actually India fell to the wayside and actually year-to-date, it's catching up again. So, it's more catching up trade than actually outperforming.
Why is now a good time to get invested in Indian equities?
India is a fantastic top-down and bottom-up story.
The top-down side is really very simple, and it's not a great complex export story or reliant on global growth or whatever. It's very domestic, and it really comes down to two main factors to my mind.
Demographic: It has a growing young population that doesn't peak out till, it's estimated roughly 2050. And when you've got a growing working age population, what that's telling you is actually there is less people that they have to carry, so less young and less old proportionately. Therefore, their propensity to consume increases and their propensity to take risk to invest also increase. So, that's one factor.
Urbanization: India today is 70% rural. Over the next 20 to 30 years, we are expecting hundreds of millions of people to leave rural areas and go to urban areas, and generally historically when that happens, and economy gets a huge productivity boost.
So those two factors alone make quite confident of the top-down big picture story is very much in place.
Quality of the companies: The final factor is the quality of the companies. When you look at Indian companies versus other emerging market companies, we can genuinely find world-class management, world-class business opportunities.
So, that's what makes us excited is the top-down and a bottom-up story.
Because of the quality of those companies, quite often Indian stocks comparable to say other emerging markets can be expensive. Can't they?
I think that's true.
You're paying for the growth opportunity. Which is great, but you can find that at another – other emerging markets.
There are two aspects here.
1) When we as developed market investors invest in emerging market economies, we are minority shareholders. So, I think sometimes there is a dislocation. People don't understand who they're sharing the shareholder register with.
Usually in emerging markets, there are two main owners; it's the state. And the trouble is, if we as a foreign investor buy a company, there is majority owned by the state, a lot of the troubles over time usually happen. In that the company will take a decision in the interest of one shareholder, which is the state and it isn't necessarily very efficient from a capital allocation perspective. So, we have to be very careful with that.
2) The other thing you get in the emerging markets is that you invest with entrepreneurial families, who might have been listed recently or even around for a long time. And it's a similar sort of problem. Some of these families, yes, they have a minority now, but they still run the companies that belongs to them.
And the net effect of both of these issues is that the great top-down story that you can find in India, the benefits will accrue to that majority shareholder. And unfortunately, the minority guy is left to one side.
What we try and look for in a company is, well, yes, we have to align ourselves with usually an entrepreneurial family, but the great thing about India and the reason why it is expensive is we can find companies, which treat the minorities properly. And, therefore, that great top-down story accrues equally to the majority and the minority shareholder. And for that reason, they are generally quite expensive.
