Transcript
Good morning, my name is Andrew Dalrymple, and I manage the Aubrey Global Emerging Markets Opportunities Fund. We have a joint venture as I think the introductions aid with LarrainVial, and I’m very pleased to be here in Chile this morning. the weather is a lot nicer here than it is in Scotland.
I obviously not being a Spanish speaker, I’m not sure entirely what you’ve just been hearing but I suspect it wasn’t positive, probably mainly not very positive about China, and I would endorse that view very much. We run as I say, an emerging market fund which is focused on the consumer in both these countries, they are the biggest markets for us, extremely important therefore for us, and it is our job to find opportunities to try and make money for investors, no matter what the conditions, and it is possible even when things are not very good. But I’ve got a small preparation about what we do here how we do it. I want to start by just telling you that the emerging market consumer opportunity and as I say, we focus on consumer stocks, is incredibly exciting. there are an enormous number of people, more than half the worlds population that live in Asian and emerging markets. by in large, they work very hard, they save very hard, they are very aspirational, they want to get up in the world. It’s that dynamic that we’re playing as investors in the emerging market consumer fund. We do it because we believe very strongly that it is the most consistent theme in emerging markets. People are basically trying to get into a better place for themselves and their family. It is a normal, human aspiration and it is a powerful drive for the companies we invest in. We are basically investing in any company that is making life better, or more convenient, or more comfortable for their customers, and that is a very good starting point we believe for investment.
So how do we go about it? First of all, this is a very simple s-curve of the way demand works, and basically what I’m telling you here is when you’re poor, your emphasis on basic necessities, clothes, drink, first house, first motorcycle, and down at the bottom of this graph is India with a GDP per capita of only 2,500. that is what we call the sweet spot for us as investors of India. whereas at the top of the chart you can see Korea and Taiwan which are not really emerging markets anymore, their mature economies, and halfway down you’ve got Indonesia. the point is that everyone in China everybody in China has got a house, or more than one house, and probably wish they hadn’t in many cases. and most people in China have got plenty t eat and drink, and therefore the interest for us is more in the service side, so we’re talking e-commerce, travel, health care, all the things being fairly sophisticated and prosperous, they want to enhance their life still further. and so that’s how we identify the sweet spots in each of the countries we operate in. and just as an illustration of this, you can see how the e-commerce sector develops very quickly, once people get to a certain degree of wealth. you can see that, if you’ve got very good eyes, you can see in China in 2010/2012, retail sales was only 7-8% but it took off incredibly quickly as people got mobile telephones, as the devli4ry system was in place, as the payment system came into place, as the country became more wealthy, it became easier for people to shop online and now e-commerce is now 35% of retail sales in China. an incredible number. and it’s going the same way in India in our view, very quickly, and has already started in Indonesia. so that’s a very exciting opportunity, as I said, a countries develop and get richer, we can exploit these opportunities to get a lot of money. and we made a great deal of money between 2015-2020 in the e-commerce sector.
So what about China? Generally, I’m not going to spend a lot of time on the economy because I think you’ve had plenty of information on that. and it’s very difficult to be optimistic about China. China is led in my opinion, by somebody who has no interest in growing community, in real terms. he is a pure communist, and he has demonstrated frequently in the last 5 years that he is not interested in the business community, in fact he doesn’t really like successful businessmen. so its not a very promising background for us as investor. add in to which, we have also seen a huge implosion disaster of the property market. the China love property, it’s been the basis of our economic model for a long time. local governments sell land to developers, developers build the properties, make good money selling it to people who are moving to towns and cities and so forth. ad it’s becoming a very big part of the economy, or was, and its declining. Now if you got extremely good eyes on this chart you can see in the faint lines behind is the growth in the ever population in China and you can see the development completions which is the dark lines, more or less kept u with demand. the demands were pretty good up until around 4-5 years ago where upon it has fallen off a cliff. this is an important determinant of peoples consumption and demand. it’s an incredibly important part of their assets. you must remember that China is a closed capital account. its. to easy to take money out of China, to spend overseas. so peoples net asset value, their family assets, or as you can see from this round circle, mostly composed of there property. its incredibly important to them. 75% of their net asset value, and if that’s going down and has gone down by about 40% from the peak. you don’t feel very positive, like buying a new car, or buying your wife a handbag or whatever. so consumption has fallen off a cliff and has been pretty difficult for us to make money in China the last couple of years. having said that, the savings rate remains reasonably high. I think this chart is a bit out of date and needs to show a decline, but people do save money and are very thrifty in China. They like to save what they can. but property is incredibly important, and if 75% of your main family asset is falling, its not good for consumption. it not a happy scene. however, it not our job to be too pessimistic all the time, we need to fin things the can invest in and can make money for our investor, and one of tr strong points of China is its exports sector. I would suggest the only really part of the China economy. they are very competitive and make things very cheaply with great success. as you can see from this red line, the exports sector is incredibly strong and has become the real powerhouse for their economy. so how do we exploit that? we invest in a company called Midea, this may be a brand name that is familiar even in Chile, we see a lot of Midea washing machines and dish washing machine and cookers in England as well. its the biggest player in China, its the number one or two in every category. its also still a very profitable company, it’s doing exceptionally well. its exporting in very powerfully across the world, and it has made a very nice contribution already to our portfolio. the other thing too that is happening, a lot of people in China are not spending so much money on cars, but certainly the younger part o the population is spending a great deal of money on travel and experiences, and this Trip.Com is the largest online travel agent in China. Pretty much everybody if they’re going on holiday, booking a hotel or train is using Trip.Com and it is by far the largest player in the market and it’s a very successful company. Again it’s a core holding in our Aubrey Emerging Market Consumer Opportunities Fund. And then finally one other you, have these in Chile and I’m sorry just say I can never remember the name – the fellas with the red baskets on the back of their motorcycles and it’s the same in China but it’s yellow. It’s a very successful company, they started by delivering meals for restaurants but now you can use their app to book all sorts of other things from hair cutting to deliveries for other things and to make appointments and even a little bit of travel as well and it’s the biggest player in that sector in China and again it’s a very very strong company, very very well financed – of our companies are extremely well financed and are definitely survivors even if the economy continues to deteriorate from here.
That’s the final thing to say on China, of course it’s been a terrible stock market I mean you can look at this graph and you can see that in the last five years it has been really really difficult to make good money in China. The yellow line is EV valuations which is the price earnings ratio of the stocks in the in the market and you can see that the valuations have declined in line with the market and actually at the current level it is as cheap as it’s been in 10 years, more or less, and so there are opportunities out there, it’s up to us to as I say, maintain the positivity to work hard find and the opportunities that are available.
So, on to India, well let’s end on a positive note, because India, I’ve just in India I was there for a week in September and I came back incredibly positive. In our view India, has never been in a better place. This is a very complicated slide I’m sorry, it is, but it contains a lot of very exciting information – it doesn’t really matter whether we’re talking about highways, railways, port facilities electrification sanitation everything has come up massively in the last 10 years since Modi came to power in 2014. We have had over 30% of the Fund in the Indian market since then, and currently we have 45% of our portfolio committed to India. But it has transformed the place, a lot of people say to me, in fact it is the prevailing the prevailing question: Are Indian valuations not too high? Well Indian valuations are at the top end of their 10-year range. We’ve got a chart later, but in our view, India has never been in a better place, so there’s no specially good reason why they shouldn’t be highly valued at the moment.
So what are we focusing on here in India, the same story the same consumer, anything that makes people’s lives better more convenient more comfortable. GDP per capita is quite a good indicator of household wealth and incomes and people’s ability to spend and you can see at the moment it’s $2 and a half thousand per head of 1.4 billion people. We’ll talk about it later but there’s a big big big base pyramid where most people have got nothing to spend at all um but at the moment it’s improving very fast and GDP per capita is expected to double by about the year 2032. This is the pyramid I was talking about, and this is even more complicated than the first slide I showed you and I am sorry, but what I’m trying to show you here is that the top 10% of the population which is the top 130 million I think in that in that in that pyramid they basically account for pretty much all or the majority of the spending in the Indian market. I’m afraid my eyes aren’t quite good enough to see what’s under here but what I’m trying to make clear, it is that 150 million people account for most of the spending in the Indian market, but there’s another cohort underneath the next bit of the pyramid down which is 400 million people who actually have now got some money to spend they haven’t got a lot, but they have got a bit of money to spend but if the economy continues to grow at 7% a year if they manage to keep inflation under control there’s a very very good chance that that 400 million people will start drifting upwards to the top of the pyramid and start to make a real contribution to consumption in India, and it’s a very exciting prospect. Meanwhile unfortunately underneath that there is about another 8 or 900 million people who are living mainly in the countryside who don’t have very much at all and that is a problem, long-term problem that the Indians have got to address but hopefully they will in time there is a process of urbanisation going on in India, but India doesn’t do big cities in the same way as China does. I think what will happen in India is that the towns will get bigger but they won’t have the same massive cities that they have.
As for opportunities, well this this chart here shows you where India in Orange is in terms of organised retail – organised retail means supermarkets shops that we would be sort of familiar with in this part of the world or in England, in India the consumer is completely chaotic at the moment – I mean lots and thousands and millions of small stalls very small family-owned little stores the opportunity for people to consolidate that to modernise it to make it exciting is something that we’re very keenly observing and very keenly aware of and we think is a very good Prospect for us.
The other thing is that the Indians are very very keen Savers and are fast becoming investors as well – there is now a large domestic fund management industry. Obviously it is mainly that top cohort in the population who is doing it but at the start of the Year there was $4 billion dollar being pushed into the Indian stock market by Indian Savers and these are not speculators who come running in and running out – they have savings and investment plans and so every month they’re putting a certain amount in and it’s grown from 4 billion at the start of 2024 to about six billion now. I mean it’s a very very good prospect. Funnily enough meanwhile most foreign investors have been selling India.
And so again, a bit like that last one I showed you in China, there there are some really exciting opportunities – Indian retail matures and as it becomes more sophisticated and Zomato again a bit like Matan which I showed you in China started as a meal delivery service they’ve now pushed it out into something called quick Commerce – where people can order on their app they can order eggs and butter and bread and yogurt and some it will be delivered to them in less than 15 minutes. What they’re doing actually is that they are pulling together lots of the small family organised businesses that I that I talked about and they are basically incorporating them into one larger store and then using that what they call a dark store to provide the locality with with their with their convenience retail. I mean it’s growing at an astonishing rate it’s very very cash generative, it’s very very strong financially – it’s doubled this year, we’ve taken a bit of money off the table but it’s still in our view a very exciting prospect I mean it’s really only started they’ve got 20 million regular users, I mean it could roll out to hundreds of millions could use this over time.
Varun Beverages is another one, it is quite a simple story – they sell Pepsi products in India, there are 27 Indian States far and beverages have the franchise in all but one of those Pepsi out sells India it out sells Coca-Cola in India it’s the only country in the world where it does because Varun Beverages have done a fantastic job we’ve owned this stock for about seven years I think we’ve made about six times our money on it on our original purchase and we’ve taken money off the table as it’s gone up, they are actually moving into Africa and you might think that’s a terrible thing to do very risky very difficult um but Indians have an incredibly good track record of going to places like Africa and making a great success of it. They’re pretty good at operating in what one might call a harsh environment – certainly a harsh business environment – they’re taking over existing franchises and modernising them.
Finally, the one that the one that I think is perhaps the most exciting of all is that India is becoming wired up – everybody in India nowadays has a telephone, it’s not a luxury, it’s becoming a necessity whether you are a Zomato motorcycle driver or just a customer for pretty much everything – that e-commerce retail slide that I showed you earlier is just starting to move northwards in India and five years ago there were only 200 million mobile telephones in India – not many of them were smartphones, now there’s 800 million. It’s growing at an incredible speed and the other thing that’s growing is the Broadband Network, I mean Indians are starting to understand businesses linked to broadband, streaming of entertainment, broadband to the home – Bharti Airtel has spent a huge amount of money buying spectrum, building out towers they have 400,000 towers around India and they have 300,000 miles of fibre network and it’s now generating $5 billion of cash per year, it’s in a position to pay its debt down extremely quickly and it’s a really really exciting story in my view and as data in India by the way costs $2 a month – it has to cost $2 a month because most Indians couldn’t afford any more than that, but as they get more used to it and as they start using it more as more of them go on to monthly packages and broadband to the home the usage per user the revenue per user is going to go sharply higher.
So that’s that’s it, we’re very optimistic about India, please take that message away, as I said earlier everyone talks about the valuations of India, and here is the 10-year price earnings ratio in yellow of the Indian market and underneath the yellow line is the white line for the market itself. I mean there have been times in the past when the market has looked quite expensive and it’s had a pullback – equally there have also been times in the past where the market has looked quite expensive and you might have thought it’s time to sell, but you might have missed an enormous opportunity, I mean in fact exactly this time last year you can see that the yellow line is nudging up against the red line um but the market itself rose and the valuation actually fell back and that was because the earnings growth in the Indian market was faster than the stock market price action, the stock prices. it’s a very very good story and as I said earlier 44%, of our Fund um some people have been saying to me well the market has fallen back a bit, what are you going to? I think it’s a great mistake to look at India on the short-term view – I think you’ve got to try to understand as best you can the long-term opportunity of 1.4 billion people who want to get up in the world, who want to make a better life for themselves and for their families and to do all the things that most of us here take for granted and use every day – and not be too short-term in terms of valuations.
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