Amid the intense hustle and bustle of Mumbai, India’s largest city, home-cooked meals are delivered to tens of thousands of office workers every day. They are transported on trains, pushbikes and even carts that crisscross the sprawling, vibrant metropolis.

Most of the food is picked up in the morning and handed over, still piping hot, just in time for lunch. The system is so accurate and reliable that, on average, only one delivery in a hundred thousand fails to reach its destination.

It sounds like the work of a cutting-edge, tech-centric business such as Uber Eats or Deliveroo. In fact, this super-efficient network – which now uses a team of around 5,000 dabbawallas, as they are known – dates back more than a century.

This tells us something about the longstanding spirit of innovation in India and other emerging markets in Asia. Crucially, it also tells us something about investing in these economies.

It shows us that remarkable solutions are often born out of necessity and forged in demanding circumstances. It reminds us that even the most promising concepts have to start small and grow over time.

Perhaps most importantly for investors, it underlines the fact that Asia’s emerging markets can be fascinating and rewarding but also complex and unfamiliar. This being the case, the best way to understand them is to be fully immersed in them.

Appeal of smaller companies

Innovation in emerging markets can be very different to innovation in developed markets. Research by Jaideep Prabhu and Navi Radjou, the authors of Frugal Innovation: How to Do Better with Less, has underlined how it is often centred on providing inclusive, truly affordable solutions.

The focus is frequently on ideas that are extremely flexible and adaptable. The dabbawalla system perfectly encapsulates this form of entrepreneurship, which is heavily rooted in improvisation and lateral thinking.

Scholars have argued that such approaches are now becoming more apparent in developed markets. Equally, more Westernised and systematic models of innovation are increasingly gaining traction in nations like India.

Yet there is perhaps one characteristic that really defines innovation in emerging and developing markets alike: the preponderance of smaller companies. Wherever they might be, it is these businesses that tend to innovate more quickly, cheaply and successfully.

The reasons are widely acknowledged. Smaller companies’ inherent agility enables them to react more effectively to churn and change and to respond decisively to new trends and developments – or even to set them in motion in the first place.

This reinforces another key message for investors, which is that in developing economies – just as in their developed counterparts – attractive opportunities exist right across the market-cap spectrum. The challenge, of course, is to find them.

Lack of coverage

Hundreds of investment analysts closely follow the fortunes of each large-cap or mega-cap business in the US. Dozens monitor those in Europe and other developing markets, providing a near-constant stream of data and insights.

Yet coverage of small-cap and mid-cap stocks is comparatively poor even in these markets. It has been reported, for instance, that an average of just four analysts look at each European small-cap.

Imagine, then, the level of coverage in a country like India. It seems fair to suppose many small-cap and mid-cap companies are completely unknown to anyone beyond its borders.

As a result, investors are routinely missing out. Despite being largely unrecognised and out of favour, small-caps have materially outperformed large-caps in Asia over the past five years – and in India this edge has mainly come not from rising valuations but from earnings growth. Right now, overall, we are unearthing more hidden gems here than anywhere else.

Take Aegis Logistics. Founded in the 1950s, it is now India’s leading oil, gas and chemicals logistics business and the top importer and handler of liquified petroleum gas – a vital component of the transition to cleaner energy. The company had practically zero analyst or broker coverage when we were first introduced to it.

Vijaya Diagnostic Centre is another good example. Founded in 1981 and still family-controlled, it now has more than a hundred medical diagnostic facilities – most of them located in the southern states of Andhra Pradesh and Telangana.

Vijaya has a proven commitment to innovation, as is most obviously evidenced by its customer-focused integration of radiology and pathology and its less centralised style of management. Even so, the business has remained very poorly covered by investment analysts.

‘Being there’

Many similar stories continue to play out in emerging markets across the Asia-Pacific region. Large-cap and mega-cap stocks may occasionally earn the attention of global mandates, but smaller companies are consistently overlooked.

This is why on-the-ground analysis and face-to-face engagement can count for so much. It can give an investment team a valuable advantage in identifying small, promising businesses with long-term potential.

By way of illustration, consider the run-up to India’s recent parliamentary elections. We met with more than 25 companies during this period, learning about their grasp of domestic issues and their views of more far-reaching concerns such as supply-chain difficulties and climate change.

These encounters confirmed India’s solid growth prospects. They re-emphasised its economic dynamism. They showcased the culture of innovation and entrepreneurship which continues to underpin many of the country’s firms, industries and sectors.

Ultimately, there can be enormous merit in developing a genuine feel for the places, people and businesses competing for capital all around the world. This particularly applies to emerging markets and, even more so, the smaller companies playing a big part in their rise.

Sometimes we might discover reasons not to invest, which are worthwhile lessons in itself. Even better, we might come away with real confidence that these businesses – like the dabbawallas – should deliver.

Gabriel Sacks is an investment manager of Abrdn Asia Focus (AAS ) investment trust.

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