An update from manager James Thom
In this podcast, investment manager James Thom provides an update on the signs of recovery he is seeing in India. He also discusses the impact on Indian stock markets, the positioning of the Trust and the outlook for 2021.
Recorded on 24 November 2020
Podcasts from Aberdeen Standard Investment Trusts – invest in good company.
Interviewer: Hello, and welcome to the latest in the Aberdeen Standard Investment Trusts Podcast series. Today we're talking to James Thom, co-manager on the Aberdeen New India Investment Trust about how India is emerging from the pandemic. Welcome, James. I wonder if we could start with an update on India's economy - are there signs of a recovery?
James: Yes, there are signs now, which is quite encouraging because India has been amongst the hardest hit of the Asian countries. And we saw when the virus first hit, a pretty draconian lockdown, which had a very severe impact on the Indian economy. We saw a contraction in GDP growth of more than 20% in the quarter ending June. So it was pretty grim for some time there. But lockdowns have now been eased and removed. Economic activity is coming back. And I think there had been some speculation around whether this was just kind of pent up demand through the kind of lockdown period, and whether it could be sustained. But we're now into several months of sustained strong growth across industries, in fact. So it looks, it looks pretty encouraging at this point with a meaningful rebound.
James: And during this period, the Indian government's been quite keen to keep spending under control and retain its credit rating. Has that held back the recovery at all?
Interviewer: To some extent, I think that that is the case, though India, arguably to their credit has been quite disciplined in trying to stick to the budget deficit targets, which are in kind of a negative territory. And that has constrained their fiscal response certainly relative to many other countries in the region. But I think the bigger impact really on the economy was the lockdown that I just referred to. And clearly, that's now been lifted and the economy is coming back quite nicely. And although India has been somewhat constrained in a fiscal standpoint, there's been quite a bit of support from a monetary standpoint with a succession of rate cuts that have been put in place. And we have seen further fiscal support come through in recent months, and a raft of other kind of support measures to support the financial system in particular, things like loan moratoriums, and general kind of liquidity being pumped in. So overall, I think yes, it's not been quite the size and scale of response to be seen from other governments, but it's been sufficient.
Interviewer: And what's happened to stock markets during this period? I mean, have you seen the same sort of dramatic fall and then recovery that you've seen in other major stock markets?
James: Yes, we have. It really has been dramatic and the markets been surprisingly strong, it is now back into positive territory year to date, it's up about 7 or 8% and hitting fresh highs again, and that marks that kind of really quite staggering kind of trough to peak return of you know, almost 70% I think from the lows in late March in local currency terms. Having said that, I think India has still lagged the broader Asia region. So if you look at regional Asia Pacific ex Japan index, it has performed even better with some of the North Asian markets like China and Taiwan, Korea, outperforming India. And really that has just been, I think, a reflection of two things, one, just having got a firmer grip on the virus pandemic earlier and therefore, they've been able to emerge from that sooner than India. And we've seen very strong performance in the sort of technology and internet sector in these markets. And that's just not really a part of the market in India at this point.
Interviewer: And have you seen that same polarisation in Indian stock markets where the winners have won very big and the losers have really been sold off very heavily. So while there's been a kind of recovery in aggregate it's actually quite bifurcated as is typical in many of the other markets?
James: Yes. So I think there has been a big kind of dispersion of returns across sectors. It is a bit different to other markets, as I say, I think, you know, in northern Asia, China in particular, or even you know, if you look further afield to the US, it's been the tech companies, the internet stocks, like, you know, Tencent and Amazon, Tencent and Alibaba in China or Amazon, Facebook, Google in the US, those have really been sort of beneficiaries almost in the pandemic and other kind of tech semiconductor type companies. India doesn't really have those types of companies. So it hasn't had that same sort of very strong returns coming from the tech sector, although it does have a very strong and large IT services sector. And that has been a standout performer with these companies also I think being beneficiaries of as the pandemic as their clients push for more digital services and a move to the Cloud. And otherwise, it's been somewhat similar. We've seen the healthcare sector perform very well as you would expect, and seen elsewhere in the world. Consumer staples, have generally done their job and being quite defensive. And then at the other end of the spectrum, the harder hit sectors have been things like financials, banks, real estate, consumer discretionary. And that's been a very similar picture in India, although now with the news on the vaccine and the normalisation in the economy, we're seeing those sectors now bouncing back quite nicely.
Interviewer: Against that backdrop, what does the portfolio look like today, are there kind of themes you can pick up on that are kind of running through it?
James: Well, it remains a high conviction focused portfolio of high quality stocks that continue to select from the bottom up based on our own first-hand research. And we really continue to look to the long term compounders of companies with strong market positions and clear, sustainable competitive advantage, I think we've had put a big focus or emphasis on balance sheet strengths through this period. It's always a sort of core part of our stock selection criteria. But I think all the more important through a period of economic turmoil like we've just been through. So the balance sheets in the companies that we hold in the portfolio are rock solid and cash flows have taken a knock but are generally pretty robust. And I think we've kind of weeded out intentionally anything where we had question marks or doubts, from a sort of quality perspective. Having said that, it remains a well diversified portfolio. We have big positions, still in the IT services sector, which as I’ve said have been a beneficiary of the pandemic this year. And we've complemented that with a couple of newer holdings. And although as I said, the internet sector is not a big sector in the Indian stock market, at least not yet, there are a few listed companies there and we've added a couple that we like and that I think are high quality players on that scene, so those have gone in. We have a big position spread in the financial sector, favouring the leading private sector banks, and those have held up much better than their public sector rivals and they continue to take share and we've more recently complimented those holdings with a couple of stocks in the life insurance sector, which remains a sort of structural long term growth story. And then I think the consumer sector and material sectors which encompasses both cement companies and paint companies play on affordable housing and urbanisation, you know, those are large positions, too. So overall, I think the portfolio remains a concentrated, active portfolio, but well aligned to some strong multi-year structural growth trends and themes.
Interviewer: Okay, are there any favoured holdings that you could highlight just as a sort of example of your process in action?
James: Yes, I mean, maybe if I just focus on HDFC - Housing Development Finance Corp given that’s the largest holding in the portfolio currently at around 10% of the fund. You know, to my mind, that is the kind of perfect example of a long term compounder high quality stock that we've held for a very long time and has served us very well. It's a financial conglomerate and its core business is in low cost mortgages. But it also has a stake in a bank, a life insurance company and an asset management business which are kind of market leading businesses in their own right. And really what they've done over the decades is work out how to lend in a sort of risk adjusted way to the middle to low income segments in India, and have developed the right systems and processes. And on the back of that, they have a very capable and experienced management team who have been able to deliver very consistent growth, but also returns and asset quality over the years, and that, over time being reflected in very strong share price performance. And I think, you know, although, you know, this is a business you've held for a long time, I think that the growth potential for this business remains very compelling, as I say, as India continues to see further urbanisation and demand for housing and therefore mortgages and other financial services products. So hence why it remains our core position.
Interviewer: Okay, I wonder if we could skip about a bit here and look at Modi. Now, he's been in power now for six years and he's put in place a reform programme. I wonder what you think of that, and how it's sort of developing the Indian economy, whether it's been a success? Is it ongoing? And you know, the prospects in future?
James: Well, I think Modi remains an extremely popular leader in India, despite the struggles with the virus and pandemic, that we’ve talked about already. And despite some reform efforts that have not, frankly not been all that successful, he seems to sort of, say the Big Bang type reform. And sometimes those are quite effective. And they've been, I think, positive for Indians, and for the economy. But not always. I think the example that stands out where it was a bit of a miss, was demonetisation efforts of reform, which really wasn't effective and caused a huge amount of disruption in the economy. Having said that, I think some of his reform efforts have been, have been very encouraging and welcome. So he's implemented and used for the bankruptcy court code. And I think that's fundamental for the efficient working of the Indian corporate environment and to banks being able to work through and restructure loans to this banking system that remains kind of heavily burdened by bad debts. I think that's a big positive. And GST the goods and services tax, I think, is another fantastic achievements - one that taken, you know - had been the focus of successive governments over the decades, but finally, Modi managed to push it through, and there is your question more to come. And we are seeing and have seen in recent months and weeks, two big new reforms in the area of labour and agriculture - it remains to be seen how effectively those get implemented. And that, as with many things in India, is key. But certainly from a headline perspective, these look like very encouraging reforms too and there's a big focus on attracting foreign direct investment into targeted sectors as well. So I think there's more to come. And, you know, whilst there have been hits and misses, on balance, I think the hits outweigh the misses.
Interviewer: And so it could it could be a catalyst for stronger economic performance going forward as well?
James: Yes, potentially, as I say, execution is key. So if you take new policy around attracting foreign direct investment, as an example for his making India campaign that was launched was kind of much fanfare a few years back in his first term, but didn't really deliver in terms of, you know, new investment and flows into India. It's been revamped and rethought through and relaunched and is now far more targeted and supported with key kind of incentive schemes, and there is you know, some evidence of early success as India is attracting a huge amount actually of investment into the smartphone manufacturing supply chain with a large number, for example of Apple's suppliers, moving to India and setting up plants to manufacture parts. And the idea is that they will now roll this out into other sectors as well. So, if successful and I say, execution is key, then yes, I think it could provide a meaningful boost to the economic prospects of the country.
Interviewer: And how does valuations look today? I mean, India has historically traded at something of a premium to other kind of Asian markets. Is that still true? Or have you found that the pandemic has actually adjusted that a little?
James: It's still true. India's never been cheap. And even with the pandemic, and although India has lagged the broader Asia region as I said, it continues to trade at a premium. And that reflects the sort of longer term growth potential of a market which is structurally, you know, set to grow, given the size of the population and economy at a kind of relatively nascent stage of its development. So I think India will always trade at a premium. Valuations this year are a little hard to decipher, not just in India, but you know, right across markets, and given the kind of disruption to earnings, so I think we've tended to look at earnings on a sort of two year four basis or earnings multiples on a two year four basis, or on a sort of price to book ratio instead, which has been less disrupted than earnings. And there, I think you see, yes, India is still trading at a premium, but it's not looking too out of whack with historical levels. And inevitably, you have to really drill into the detail. And there are some very expensive stocks in India. But I think there is still some pockets of value as well. And I would point to a stock like HDFC. Where I think the valuation there is an example, in a financial sector which has been beaten down over the course of the year, I think they're, you know, there is still value there.
Interviewer: Great. And I wonder if we could just finish off by talking a little bit about the outlook for 2021?
James: Well, I'm more optimistic now, in my outlook than I have been for quite some time. India has been through a pretty rough two or three years, in fact, so if we rewind to 2019, it was kind of in the midst of something of a financial crisis, really, with bad debt in the financial system. And this was kind of weighing on lending and the availability of credit and therefore growth more broadly. And it felt like it was just about emerging from that. And then, of course, the pandemic hit, and that and the lockdown and the very severe impact that had on the economy. And now finally it feels like the country’s emerging from that. And whilst there's been a lot of caution and concern, understandably, when talking to companies now, there is a very clear sense that the tone is changing. Management teams are finally becoming a bit more optimistic. And as I say, there was speculation that a lot of the kind of demand that we were seeing post lockdown was just pent up demand. But that seems now to be sustained. And whilst there's a risk, of course, that we'll see a second wave of the virus in India and we certainly shouldn't kind of rule that out. Barring that, I feel quite encouraged that growth is coming back and can be sustained and that will make for quite an encouraging 2021.
Interviewer: Great, okay, thank you James for those insights today and thank you to our listeners for tuning in. You can find out more about the trust at www.aberdeen-newindia.co.uk and please do look out for future updates.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer investment recommendation or solicitation to deal in any of the investments of products mentioned herein does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen standard investments. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns, return projections or estimates and provide no guarantee of future results.