The Emerging Market Equities Podcast – India: reform, recovery and the new economy
In this podcast we hear from Kristy Fong, manager of Aberdeen New India Investment Trust. Here she discusses everything from the effects of the pandemic to how the Indian government's reforms might affect the country's growth. Kristy also talks about the challenges facing India, and how it might balance a greener agenda for carbon emissions with economic development.
Recorded April 2021.
Nick Robinson: Hello everybody and welcome to the Aberdeen Standard Investments Emerging Markets Equity podcast. I'm Nick Robinson from the EM equity team.
In this podcast series, we explore the factors that underpin our thinking on Emerging markets. From key individuals to evolving trends, we seek to answer the five w's - Who, What, Where, When and Why - that are shaping investment opportunities in the region.
Today we're going to discuss India. Now there's a lot going on in India at the moment as the country recovers from its coveted slump and enacts reforms to boost growth, whilst at the same time, several new economy companies are coming to market to broaden the investment opportunity set.
So, to help me approach this subject I’m very happy to be joined by my colleague Kristy Fong. Kristy is based in Singapore on the Asian Equities team and she's been with the firm for 16 years and she co-manages our Indian Equity products - Kristy welcome to the podcast how are you.
Kristy Fong: Great - I'm very pleased to be here thanks for having me.
Nick: You're welcome, it's a great pleasure to have you on. So I hear you're planning a trip to see Indian corporates face to face next year, I think we're all pretty excited about getting out there and visiting company management teams again. How's it been communicating with management teams during this pandemic?
Kristy: Yeah you know ,I like to hope for the best, but you know communications with Indian corporates have been very smooth actually thanks to technology. You know many companies are now a phone call or a video call away so, it's been, it's been very good. Obviously, it's nothing like seeing them face to face, so we really can't wait to be there in person - crossing fingers.
Nick: Yeah well, certainly cross fingers for that trip. So, Kristy, perhaps a good place to start on India is - could you talk us through the last year for the country and how badly was it hit by the pandemic and how do you think the recovery is going at the moment?
Kristy: Well, so unfortunately India was one of the worst hit globally and it was the third most infected behind America, the U.S and Brazil last year and this is despite a very swift nationwide lockdown so obviously if you look at social distancing efforts it's not, you know it's proved futile. The lockdown has been a huge economic cost, we've had GDP contracting 7.7% for the financial year so India really looked, you know, the situation was very, very, dire for India for most of 2020. But if you look as we have seen elsewhere, the situation was improving - caseloads have been declining since mid-October and you have economic activity picking up and obviously the vaccine rollout is progressing slowly but surely and many companies we talked to are you know are guiding for the worse being over and recovery being underway. But again, to stress here that, you know, not all companies have that same optimism. The companies we focus on are the better managed ones with strong business models and balance sheets, so even as you've had macro-economic growth being severely impacted, these companies have been able to gain market share, so they have been able to grow faster than peers.
Right now, as you see, India is again going through fears of a resurgence in cases - Mumbai being a hot spot - so this could hinder the pace of growth recovery, but we were not expecting a straight line or V-shaped recovery in any case. As long as India doesn't go back to the nationwide lockdown - which to us is a very unlikely scenario - we do not expect a repeat of the dark days of 2020 and obviously we look at India with a long-term lens and continue to be very optimistic about the opportunity set in India.
Nick: Great, and pre-pandemic India was very much a reform story as Modi enacted several significant reforms during his first term. You'd probably say that the pandemic has been the overarching theme of his second term so far, but do you think we're likely to see that reform story return and also do you think there's a risk that Modi's performance in the pandemic has undermined that somewhat?
Kristy: If you look at how we think about India, you know one key thesis is that there is potential from the structural reform and that's something that hasn't changed. We recognize that there are challenges in execution but unlike the previous governments the Modi led BJP is saying the right things about reform and they have the political mandate to pass rather controversial bills. So if you think about reform progress, I would say that prime minister Modi has done well in his first term to pass the goods and services tax bill. You know he's also made several policy moves with the intention of removing or eradicating corruption and making potential defaulters accountable - you know whether it's through demonetization or the bankruptcy code. In reality they were disruptive to business and I would say one of the factors along with the non-bank financial crisis for the slowing growth that India experienced even prior to the pandemic.
And if you look at the second term since 2019, the prime minister’s, you know, seemed to have prioritized nationalistic policies and disappointingly you know, taken his eye off the economy. So, to your question about whether it undermines his reform efforts, actually I would say that the crisis probably has been a wake-up call. There's little choice that the government has given that there is little means to announce big stimulus plans, so little choice but to strongly reaffirm their reform commitment. And you've seen that happen in the past few months, whether it's the passing of the agriculture and labour reform bills or even in the most recent budget in February making strong commitments to infrastructure spending, you know, several initiatives – ‘make in India’ initiatives to encourage more foreign investments in areas like handset manufacturing so hopefully more pro-growth this time.
But on policy reform, you know the devil is in execution and we are well aware of implementation challenges. There are ongoing protests by farmers against the agricultural bill, they're fearful that big companies might benefit at their expense. But really what's more interesting to us is what is actually happening with companies, and one of the key beneficiaries of reform has been in real estate. It's been four to five years since the passing of the real estate regulation act and since then we have seen a massive clean-up of the real estate sector and an exit of many operators who you know who have been very unreliable. But you still have demand from home buyers and they just want to - they're only interested in - buying properties sold by reputable and professional companies. So what we've seen even during the pandemic is that many of the market leaders, just a very small handful, they have seen very strong property sales.
Nick: And continuing on the theme of policy, I mean with the announcement of China's carbon neutrality plan and the election of Biden in the U.S, we're really seeing this trend globally towards decarbonisation. What's been India's stance on the issue and what's been their approach so far?
Kristy: India has not actually said anything official but you do have the press reporting about how top government officials are debating a net zero target for 2050 - maybe even 2047 that puts them ahead of China - which looks very ambitious. But even before this you've seen the country already announcing pro-green policies such as increasing the share of natural gas usage you know from 6% to 15% by 2030; ramping up renewable power capacity to 450 gigawatts by 2030 - so there is the intent.
And this is important you know, you have India being the third largest carbon emitter and actually speaking about this it brings back memories of how I had already started my mask wearing habits when I last visited Delhi in 2019 and you might have read in the papers about the really bad smog problem. The challenge obviously for the country is finding a way to balance the green agenda and economic development.
Nick: Yes, I mean the smog problem sounds pretty grim. You would hope that such a bad problem would be something that would catalyse real change in policy. Are there ways to invest in the green opportunity in the local Indian stock market or is it the case that investment opportunities may themselves be outside of India.
Kristy: Well not to the extent of China's renewable opportunities but we have identified some companies that could benefit from a step up in investments in clean energy. One example is Gujarat Gas which is India's largest city gas distribution company in the state of Gujarat. This is a company that we are very familiar with, we've held it even before British Gas sold their stake to the Gujarat state-owned utility. And we like that even with the change towards state ownership, it has maintained its professionalism and profit focus.
One of the key positive changes that has happened to the company in the last couple of years is that the banning of coal gasifiers in the region which is the largest textile manufacturing zones in India has benefited the company massively because of this forced shift to cleaner gas and we see this as just the beginning as India gets more serious about reducing carbon emissions. The other example is Power Grid that is a national transmission utility and one that is likely to grow as India increases its capital expenditure in renewable energy.
Nick: And how would you say Indian companies are doing in terms of embracing environmental social and governance issues? In your discussions with them, do you get the impression that they're taking the issue seriously?
Kristy: India is a big market that's hard to generalize, but if we focus on the companies that we take an interest in which typically would be those with a strong governance track record there has certainly also been a greater awareness of environmental and social factors. In fact we think that a company with strong governance is more likely to think holistically about these sustainability issues affecting all stakeholders and if you think about India environmental and social issues are actually not new, many of these companies have had to deal with unpredictable weather conditions or labour issues, so it's almost an operational matter that has to be addressed. But all being said you know, our companies are definitely getting better versed in discussing these issues and understanding the expectations of investors. Many are starting to improve disclosures through sustainability reports and are able to discuss how the board of directors are looking at risk metrics. So companies are certainly not surprised when we raise ESG issues and it has also been two-way in that they do come to us to get our opinions on certain matters and what's important to remember is that for many of these emerging market companies, they may not yet be at the finishing line but as we want to keep them moving closer to it, it's important that we remain engaged.
And if I may share an example of an engagement journey with one of our companies, Ultratech Cement. It's one of our core holdings, yet it is in a sector that is, you know, one of the highest emitters - so how do we reconcile the two? I mean, we think about cement companies in developing countries, they are part and parcel of infrastructure development. Banning cement to us is not the solution, instead we find it more constructive to encourage companies to adopt processes for cleaner cement production.
So if you think about our very first engagement back in 2017 when we started talking to them about climate change, their approach towards energy efficiency. Back then, it was more educational, and I recall our team setting milestones such as reducing clinker, improving kiln efficiencies, using alternative fuels etc.
Two years on when I met Ultratech during my last trip to India, I was very impressed by how they spoke about factoring a hypothetical carbon tax of $10 into their project capex calculation and that really is a way for them to shift mindsets internally and to get project teams to be more accountable for the emissions impact.
And when we spoke to them last year you know they made more progress they shared the adoption of science-based targets to analyse their carbon trajectory and their aim is really to align themselves with global efforts to keep global warming under 2 degrees Celsius. This year we have observed how the company has improved its disclosure to the investment community, you know it recently issued a sustainability linked USD bond where the coupons will increase if they do not achieve their green targets. So we've been very encouraged to see our engagement efforts bearing fruit and this is why we continue to see Ultratech being one of the best in class in the sector.
Nick: Thanks Kristy for sharing that, that’s really interesting to hear how the engagement has evolved over the years and actually you know the company themselves creating a structure to financially disadvantage themselves for not meeting sustainability targets gives a lot of confidence they're taking the issue seriously I think.
We’ve seen the huge transformation of the Chinese stock market in the last decade in terms of the much wider investment opportunity set in new economy companies. In comparison, the Indian opportunity set looks quite narrow still with the largest tech companies being the big global IT outsourcing companies. How has this been evolving and could you tell us about some of the new companies that are listing?
Kristy: Yeah, I mean it's true, if you look at the Indian listed space there are not many names in new economy. You do have the IT services firms and just a small handful of digital proxies, if you consider Reliance through their Jio platforms or Info Edge which is an online recruitment company with a portfolio of start-up assets. And there is also another small cap undercover name called Affle that we like as an e-commerce beneficiary given that it's got Amazon as a key client. So not many listed digital companies that we can consider and many of them have been confined to the private space, but you know it's now changing. We are expecting more IPOs of these companies in the coming year and one factor we think could be that Covid has truly fast-forwarded digitalization trends by a few years. Yeah and we expect these new listings to enhance India's attractiveness as a place for us to invest in, some of the more interesting names include an e-sports company called Nazara, it just listed yesterday actually, you’ve got names in the fintech space whether it's the well-known company called PayTM that may list in a couple of years or Mobiqkwik that's in mobile payments and in the buy-now-pay-later space.
And as I've mentioned Info Edge, you know some of the companies are coming to the market as well, whether it's Z umato that's in food delivery, Policy Bazaar in online insurance and a few other names like a logistics solutions provider called Delhivery in Delhi and a similar name to Autohome in China called Car Trade - it's an auto classified business. So yeah India is looking ever more interesting with these new listings.
Nick: Yeah that really does sound interesting I mean it's, it's really good to see the market broaden out now in the way that it is and I certainly look forward to hearing more about these new listings in the future as you continue doing the due diligence on them.
So that's the end of today's podcast, so with that the only thing left for me to do now is to thank my guest Kristy.
Kristy: thank you.
Nick: and also thank everyone who took the time today to listen in. If you enjoyed today then please download our other podcasts from our website or wherever you normally get your podcast watch out for our next episode and tune in.
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.