A Portfolio Manager’s Q&A
You have strongly overweighted India and slightly underweighted China compared to the MSCI EM Index. Why?
At Aubrey, we have had approximately a third of our GEM fund invested in India since 2014 when the transformational Modi government took charge. India has a number of positive factors supporting economic and corporate growth, such as positive government policies, ideal demographics, urbanisation accelerating, and an increasing middle-class consumer base. It also has some very well managed, high return growth companies to invest in, and many of these have competed with multi-national companies for decades. It will be the world’s 3rd largest economy in the next few years and we argue that any Asian or Emerging Market Fund should have a significant exposure to India.
It is important to note that we invest in companies, not countries. Our Indian exposure is high because we have found companies there that meet our strict investment metrics. Similarly, we have more caution toward China at present, but we invest in excellent companies with significant cash generation and growth prospects rather than targeting a slightly underweight position in China.
Many successful companies have been started by enterprising people who did not enjoy Government support, and who are wary of political interference in their business. Governments, such as China’s, can be supportive to industry and the development of the EV industry over the last 10 years is an example of that. However, we are mindful of the risk of politics and have had zero exposure to companies from Turkey, South Africa and Russian for many years.
India has not only replaced China as the world’s most populous country. Some experts also talk about India taking over China’s role as the “workbench of the world.” Several international corporations have already opened new production sites in India. At the same time, India’s GDP per capita is significantly lower than that of China.
India’s population growth presents opportunities, but the government must invest in the infrastructure of the country to support this development. Education, healthcare, formal employment, and infrastructure will all be required to facilitate a modern economy. This is happening and is particularly evident in urban areas. It will support economic growth and employment opportunities as people move from lower paid rural regions into modern, urban employment.
China has had a historic advantage, producing electronic items on a large scale in factories that employ tens of thousands, such as the Foxconn plants that assemble Apple products. The move by many companies to have a ‘China plus one’ manufacturing capacity has supported investment in Vietnam, Thailand, and now also in India, but China will remain important for many companies as products can be made and sold into south east Asian markets, but less likely to be sold into the US.
Apple products are now assembled in India, as the government demands to have manufacturing facilities in their country of sale, as they did in Japan, Korea, and western countries many years ago.
The GDP figure can be misleading in that the country can grow, but population slows and the GDP per capita continues to rise. Look at the Japan experience over the last 20 years. China’s population is close to its peak but India is forecast to continue to rise to 1.7bn by various international agencies. Both will continue to grow the GDP per capita but it is the income that the consumer enjoys that will support the services and product growth.
Against this background, what opportunities does India’s domestic consumption offer for international investors? How do you assess India’s growth opportunities?
India’s domestic consumption has been appealing for many years and the presence of many international companies such as Nestle and Unilever reflects this. The Tata group of India has existed for over 150 years and has developed many companies and industries over that period. It is the Indian companies that appeal to us. These domestic champions are often established brand names, with experienced career company management, and an excellent insight to the changing domestic population trends.
The bigger picture is supportive with Government reform and infrastructure expansion; the educated and urban population are enjoying real income and wealth creation; and the consumer is embracing services and products from eCommerce shopping via their mobile phones to Pepsi soft drinks and enjoying the air con in the shopping malls. But this is a small segment of the population and the longer term opportunity for the additional one billion and more inspires confidence for future decades.
As always, it is our role as analysts and fund managers to find the good businesses with proven management, cash generation for expansion, and paying the correct multiple to invest our clients money to find reward in this longer term opportunity.
This article is part of an interview with Aubrey’s EM PM, John Ewart, and Fundview, the German financial media company, Fundview’s coverage of this interview can be found here.
A pdf version of the article can be found here.