24 May 2023
Spring weather in London has been mixed but I was able to grab a roof garden photo opportunity after a meeting at Goldman Sachs in London. I caught up on the Goldman view on prospects for India which, unlike many economies in the world, is seeing an improving macro environment and is likely to record economic growth this year of close to 6%.
Inflation is at the upper end of its range but is only slightly above target in contrast to western countries. The pullback in commodity prices in recent months, especially oil, is a positive for the Indian economy and will further help the consumer. Goldman expect double digit earnings growth in India in 2023, something few markets are likely to match. Goldman believe the reform agenda in India has accelerated with cuts in the corporation tax rate, a unified nationwide goods and services tax improving supply chain efficiency and the passing of a new bankruptcy code which has helped banks to clean up non-performing loans. Names such as HDFC Bank, Bajaj Finance, which is exposed to auto lending, and Godrej Consumer Products, are poised for multi-year growth making the fund an interesting option for investors looking for above average growth prospects who can tolerate the higher risks involved in investing in a single country fund. This fund has a strong long-term record and is prepared to invest substantially away from the main market index, often holding over a third of its portfolio in small and mid-cap stocks where growth prospects should be better than the broader economy.
I then had the opportunity to meet with Sujaya Desai, the manager of Stewart Investors’ Global Emerging Markets Sustainability Fund, who was in London for their Sustainability Conference. This fund also has good exposure to stocks in India where exposure is just under 40% of the portfolio. The largest holding is in the Housing Development Finance Corporation, which is now merging with HDFC Bank, allowing it access to cheaper deposit funding, and expanding its reach in terms of mortgage penetration. Another favoured bank name is Kotak Mahindra. The banking sector and mortgage lending remain very under penetrated across the wider population and have significant growth potential over time. Tube Investments of India has transformed itself from a low value-added metal basher to one producing precision steel products and is now able to compete on an international basis, benefitting from India’s relatively low-cost base. The country continues to benefit from supportive demographics with a young population looking to upskill and move away from casual agricultural employment to manufacturing and services.
IT services provider Globant, a relatively new holding based in Argentina, has performed well operationally despite the macro backdrop of the country being extremely volatile. Globant can be compared to the Indian IT outsourcing companies but is growing much quicker and is New York US listed but part of the emerging market index. Infineon Technologies, the largest chip maker for the automobile industry, is another recent purchase with over 50% of its revenues coming from emerging markets including China.
The team have struggled to find many high-quality ideas in Southeast Asia although they do hold the family-controlled business 7/11 franchise in the Philippines and in Indonesia they hold the high-quality bank BCA. Indonesia is the only country where bank directors are personally liable for the actions of the bank underlying the long-term stewardship argument for holding this company.
The team at Stewart Investors believe there are strong growth prospects for longer term investors in certain emerging market names and have a high focus on quality orientated businesses that are successfully managing their businesses through both up and down economic cycles and where managements are good long-term stewards of investor capital.
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