Earlier this month, Narendra Modi’s Indian government announced 500 and 1,000 rupee (broadly equivalent to five and ten pounds) notes would cease to be legal tender by the end of the year. Whilst this has caused some short-term chaos, particularly in India’s thriving cash economy, it is further evidence of the government’s determination to enact bold economic reform. Amongst other things, this policy is likely to offer long-term benefits to some of India’s better run banks as digital transaction volumes increase.
In addition to the longer term positive effects emanating from its ongoing reform programme, the country benefits from a huge and growing population and GDP growth of 7-8% per annum. At a stock level, our favourite position in India is HDFC Bank, which is the largest private bank in India. The company has taken a very forward looking approach towards digitising its back office and is growing its loan book at a rate of 20% per year. Because it has already invested heavily in its infrastructure, it appears well positioned to reap the rewards of this growing loan book without being exposed to significant growth in overheads.
Not all banks in the developing world are created equal though. In China, the government does its banking sector a disservice by continuing to drive banks’ lending policies. As a consequence, many fundamentally flawed state-owned enterprises continue to receive bank loans despite the very real possibility that they will be unable to service their debts in future. Our on-the-ground research suggests a significant portion of Chinese loans could turn bad, this is a major concern and means at some point China’s banks will almost certainly require recapitalising.
This is not to say that China can’t offer us interesting opportunities. The country remains very much a burgeoning consumer story. This once again became apparent on November 11th, otherwise known as Singles Day. This day originated as a celebration of singles, but has now turned into an online shopping event that dwarves even Black Friday in its scale. Alibaba alone saw $18billion worth of sales, up from $14 billion in 2015. Overall this consumer story is well understood, however some companies are clearly better placed to benefit than others. When it comes to finding the key beneficiaries, our focus is on market leaders which operate in under-penetrated areas with significant structural growth potential.
This is for Investment Professional only and should not be relied upon by individual investors. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. The ideas and conclusions featured are the author’s own and do not necessarily reflect views being actively implemented in Fidelity’s range of investment products and solutions. They are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security. Please visit www.fidelity.co.uk for more Fidelity fund manager market insights and perspectives.
