Global equities boutique Bell Asset Management’s chief investment officer, Ned Bell, speaks to theinstoreport about his recent research trip to India, where he discovered many companies are rarely visited by long-only global equity managers.
Where and when did you go on your trip?
I have just returned from a research trip to India, where I spent a week visiting companies in Delhi, Bangalore and Mumbai.
What was the purpose of the trip?
It was twofold: one, to get to know Indian corporates which screen well for us on profitability measures, and two, to get a better understanding of the real implications of a Bharatiya Janata Party leader Narendra Modi election victory.
[Note: Modi was sworn in as Prime Minister of India on 26 May.]
What stood out most about the companies you visited?
The companies I met with were extremely well managed and intensely focused on maximising return on capital – the average return on capital of the companies I met with was 19.7 per cent, which is pretty impressive.
Most of the companies I met with are also growing their top line at plus 15 per cent, which is pretty punchy given their recent economic weakness.
I also felt that many of the companies I met with were better managed than some of their bigger global peers.
How is this sector performing at present?
Over the last five years, Indian equities have underperformed other emerging markets and developed markets as a whole.
In the last couple of weeks we have seen a rush of hot money chasing the market in anticipation of a Modi victory.
I suspect we will see a period of consolidation in the next three to six months as investors recognise that the new government cannot wave a magic wand and have the economy growing at 8 per cent again.
In my opinion, we are at the beginning of a long-term bull market in Indian equities, which will be underpinned by a gradual ramping-up of infrastructure projects.
What can local investors learn from this market?
Stock selection in emerging markets is very important. Taking a macro view on emerging markets and simply allocating assets on a passive basis is dangerous as there is a huge difference between high and low-quality companies in all emerging markets, including India.
While corporate India has had a couple of well-publicised scandals in the last few years, there are still some very good companies with excellent long-term prospects, which are misunderstood by long-term global investors.
Most of the companies I met with seemed surprised that I was visiting them and told me they were rarely visited by the global long-only fraternity.
Do you have any holdings in this sector?
We don’t at the moment as we are still in the due diligence phase of our research process, with approximately 12 stocks being reviewed.
Are you considering changing your allocations to this sector?
Subject to our ongoing stock-specific research, we will be looking to include some Indian equity exposure to the portfolio.
Having said that, we are always mindful of valuation as well as quality and hence will not be rushing in after this most recent rally.
What is driving the growth in this sector?
Economic growth rates have slowed in recent years to around 4.8 per cent, but looking ahead the change in government will be a game changer and I would expect growth rates to accelerate to around 6.5 per cent within two years.
The new Prime Minister was hugely successful as the chief minister of the state of Gujarat, where he was credited for excellent economic performance in the last 10 years, driven by infrastructure programs and the agriculture sector.
I would expect him to attempt to replicate his ‘Gujarat model’ across the country – this will be easier said than done, but Modi is known for surrounding himself with very smart people and cutting through red tape.
What are the risks to this sector?
While there is most definitely cause to be optimistic, there are also risks.
One of the biggest risks with the new government’s ability to execute its agenda will be their ability to work with the state governments. The previous Congress-led government was ineffective in this respect.
Another considerable risk relates to the new government’s ability to control the massive Indian bureaucracy, which can take at least some of the blame for the slowdown in infrastructure in the last few years.
What implications do these findings have for your portfolios?
We will opportunistically build positions in Indian companies over the next 12 to 18 months.
Not only have we discovered some very well-managed and profitable companies, but they also exhibit far superior long-term growth characteristics than their developed market peers.
Most interesting or unusual custom you came across?
Not so much a custom, but as a relative newbie to India, the fact that cows roam the streets and cannot be moved on was a bit different. I was stuck in numerous cow-related traffic jams.
Next planned trip?
I will most likely return to India to meet with more companies toward the end of the year.