After a number of buoyant years for India, where the economy and stock market have both seen significant expansion, these have been tougher times for the country.
It has been affected by poor sentiment towards emerging markets generally, but there is also looming political disruption with a General Election next year likely to be a referendum on Prime Minister Narendra Modi’s leadership.
Speaking exclusively to International Adviser, Venkatesh Sanjeevi, senior investment manager on the Pictet Indian Equities Fund, says investors should not necessarily fear the outcome.
Certainly, Modi has implemented some strong, credible reforms and has been a force for change in India. However, no incoming Prime Minister could neglect the economy: “While it is quite important who is in power, no government can’t ignore the need to create growth. The dynamics of the country are important, so if Modi doesn’t get back in, it’s not the end of the world.”
As it stands Modi lacks a credible opponent and remains popular with the majority of Indians. Certainly, not all of his policies are working as the government had hoped, but some reforms will take time to filter through. Sanjeevi believes India is progressively becoming an easier place to do business: “There are good long term measures in place, even if they have not yet reached their targets.”
India has not been immune from the problems affecting wider emerging markets. Sanjeevi says: “We live in connected times. It is not possible to steer from the global ecosystem, even though exports are less than 20% of GDP. Many of India’s exports are in areas such as pharmaceuticals, engineering and technology, and are focused on US and European markets.”
That said, there are signs that Indian companies are benefiting from the US/China trade war. Companies are starting to consider alternative sourcing arrangements, away from China and India features in that.
India is a net importer
For Sanjeevi, the macroeconomic picture is an important input into the group’s process, but they are stock pickers first and foremost. He is also wary of being distracted by ‘noise’: “Our job is to take a view. A few months ago, the market’s main worries were fuel prices going up so sharply because India is a net importer.
There was also a large default in the Indian non-bank sector. Today, the oil price is down and the focus is changing.” He is looking at the potential impact on domestic corporate health.
The group’s philosophy is based on two main pillars: quality, at the right price. Sanjeevi adds: “We are bottom-up investors, believing that companies should be well-managed and good quality, but with an attractive valuation. We have our own benchmark as to what defines ‘quality’.
“This is based on metrics such as the integrity of the management, and how they treat minority shareholders. They need to achieve around 15% return on capital. On price, we are not fixed to a certain metric, but aim to build a measure of intrinsic value. We are happy to pay a high multiple if it is high growth company.”
High conviction approach
The fund holds a ‘high conviction’ 25-35 stock portfolio. While there are no official sector limits on the fund, over the years, it has struggled to find companies in the energy and telecoms sectors that have met its criteria. Companies within the sector have tended to have poor return on equity.
As a result, the fund has been underweight these areas for a long time. In contrast, he has been able to find more interesting stocks in the financials and technology sectors.
The fund management team has a number of red flags for companies it avoids. In particular, it takes a dim view of any moves against minority shareholders. Sanjeevi also wants to see companies behave with integrity, with strong corporate governance.
This would be seen in a company’s relationship with its suppliers and the honesty and track record of the management team. “It is all about understanding their philosophy before we invest,” he says. “We want to ensure that companies are run with investors in mind and there is no irrational exuberance in decision-making.”
He admits that early this year, it had become difficult to find companies that met his criteria at the right price. Markets had risen rapidly and good value was thin on the ground. He says: “Stocks were expensive, particularly in some of the small and mid cap names. In this environment, it was difficult to find good ideas.”
Today, it is a different picture. Although, at 17x, the market is not cheap, but there are areas that look good value: “I am finding more and more ideas. We are overweight in financials, in technology and in utilities. We stick to our discipline and we are finding plenty of good companies trading at good valuations. We’ve added quite a few names during this recent rout.”
The fund currently sits 10th in the FO Equity-India sector over 5 years, up 127.4%, around 20% ahead of the peer group average. This year has been tougher, but it has lost less than the wider sector.
Sanjeevi believes valuations today are far more realistic, which has left the Indian market looking attractive once again.
