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James Carthew: ignore India’s polls and pick a stock picker

13 May 2019

Indian companies have had to learn how to thrive regardless of politicians and central bankers. The country’s election is just a distraction we should ignore.

India is going to the polls and results from the general election will be declared on 23 May. It looks as though the National Democratic Alliance, the coalition of the BJP (Bharatiya Janata Party) and various regional parties, will be returned to power and Narendra Modi will hang on to his job as prime minister.

This is not a given however, and the uncertainty created by the elections has been a contributory factor to volatility in the Indian stock market over the past six months.

One of the BJP’s election messages is that it has contributed to the strength of the Indian economy. In July last year, when I was writing about the launch of Ashoka India Equity (AIE), I mentioned that the country’s economic growth seemed to be heading back towards 8%.

However, in recent months we have seen questions emerging over the reliability of India’s GDP statistics. A third of the companies used to sample the economy in the Ministry of Corporate Affairs Database are said to be either misclassified or non-existent.

There are more reliable indicators that suggest that the pace of growth is slowing. For example, unemployment appears to be rising and the purchasing managers index (PMI) is falling, suggesting that business confidence is shaky.

Another important consideration is the recovery in the oil price from its December lows. India is a big importer of oil, and Iran has been an important supplier in recent times. The renewed US sanctions on Iranian oil, imposed last November, allowed India to continue to import some Iranian oil up to the end of April, but now it must look elsewhere.

These are short-term factors and for me the long-term story remains intact. India, which is forecast to be the most populous country on the planet, is changing rapidly. Its middle class is growing; it is adopting new technology; urbanising with the population of towns and cities forecast to double by 2050; and starting to tackle its chronic pollution problems – some states have already banned single use plastic while by contrast the EU’s ban doesn’t take effect until 2021).

In addition to the four India-focused trusts – Aberdeen New India (ANII), India Capital Growth (IGC), JPMorgan Indian (JII) and Ashoka – a few others are heavily exposed to the country. These include Fundsmith Emerging Equities (FEET), where India was 38.4% of the trust at the end of April, and Pacific Assets (PAC), which had 33.2% of its portfolio in India at the end of March. The two trusts share many of the same holdings.

Stewart Investors, manager of Pacific Assets, held a conference recently at which it laid out its approach to investing in India accompanied by presentations from a few of the portfolio companies it holds. It was an encouraging morning, highlighting the potential rewards and frustrations of investing in the subcontinent.

One of the first messages was how Indian companies have long had to learn how to thrive regardless of the actions of politicians and central bankers. Arguably the elections are just a distraction that we should ignore. The government has done some things right though, such as establishing a national system for electronic payments and introducing Aadhaar, a national ID system used to manage social security payments. I think the goods and services tax, introduced in 2017, may also turn out to be transformative but its introduction did cause some disruption.

Another takeaway was that companies are embracing technology, allowing them to catch up and even leapfrog western rivals. Smartphone usage is high and growing rapidly. Kotak Mahindra Bank (KTKM.NS) says it can open a fully KYC (know your client) compliant bank account via a mobile phone application in five minutes using the Aadhaar system.

Air pollution is a real problem. India is embracing renewable energy at an impressive rate but Stewart Investors is also backing one of India’s natural gas suppliers.

For me, one of the most fascinating presentations was made by the chairman of Tube Investments of India (TBEI.NS). The company, originally a bicycle manufacturer, has been revamped under his leadership. The presentation started out with some fairly dry numbers (return on equity and profit margin targets, for example), included some espousing of the benefits of family holding companies (chiefly a willingness to invest for the very long term), and then discussed his philosophy of empowering his workforce, encouraging them to use yoga techniques to work better as a team.

This once sleepy company now even has ambitions to take on the electric vehicle market (on three and then two wheels rather than four).

Bangladesh’s BRAC Bank (BRAC.DH) is another great company. Its founder shareholder was a Bangladeshi NGO and a provider of microfinance. The bank was established to serve businesses that were too small to be of interest to most banks and too big to be able to subsist on microfinance. That background makes it a responsible lender (it moderates the interest rates it charges to make its loans more affordable). It is also looking at mobile phone banking, in a market where it reckons 90% of people don’t have access to a bank account. The growth potential is huge.

The Stewart Investor conference and the chats that I have with Gaurav Narain, adviser to India Capital Growth, convince me that the stories behind the businesses are often much more compelling than the macro picture. Market timing is hard; better to find a stockpicker that you trust will do a good job over the long term and stick by them.

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