Tales of growing innovation and scale of opportunity
Fiona Manning, co-fund manager of the Premier Miton Emerging Markets Sustainable Fund, hits the road and shares notes from the team’s company research trip to India.
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
The only way is up
In more ways than one, our arrival in India proved to be in sharp contrast to our trip to China in the Autumn. We landed in Mumbai in early December, just as the results of key state elections hit the newswires. Indian markets were driven yet higher as India’s ruling party, the BJP, won in three of the four key states. This sets the stage for Prime Minister Narendra Modi’s run at a third term this year, where expectations are for a solid victory. The election flyers on every billboard serve to highlight the vibrancy of one of the worlds largest and most dynamic democracies.
The mood amongst senior management at the companies we met in the four cities we visited – Mumbai, Pune, Delhi and Hyderabad – was similarly upbeat. The IMF forecasts GDP growth in India to remain strong at 6.5% for the next two years, far exceeding expectations for both China and developed markets. There was much discussion of the “China Plus One” strategy and the focus on “Made in India” as India seeks to attract greater foreign investment and upskill the manufacturing base. Whilst every management team we spoke to welcomed the prospect of greater investment and faster development, many also highlighted that this was not a short-term story in both senses- the runway for growth is enormous but the investment and development needed to get that is significant and cannot be delivered overnight.
The road is long
That said, evidence for government infrastructure investment was all around us, particularly in the slick airport and road connections into the centre of Hyderabad, where the city looks to have been transformed with new development over the last decade. Although this was not the case everywhere. Individual State and Municipality administrations are still critical for driving local progress and Pune and Mumbai are still feeling the pain of delayed metro construction programmes. It is perhaps no coincidence that the State of Maharashtra has been found to be the most corrupt in India and that India itself has fallen down the ranking in Transparency International’s Corruption Perception Index.
Whilst our car journey through the countryside between the two cities was a great opportunity to see the sheer scale of the upgrade works being undertaken, it also highlighted some of the challenges that India still faces – the volume of traffic both in the city centres and on the highway remains high and the impact this has on air quality should not be underestimated. Similarly in Delhi where many of the corporate offices we visited had local air quality indicators well into the red for particulate concentration.
It is not just the environmental indicators which suggest that India still has a lot of work to do. Although India now has the largest population in the world, World Bank data shows that 44% of the population is still employed in agriculture; not only is this well above China, it is in fact the same as North Korea. 74% of India’s workers are considered to be in vulnerable employment and female participation in the workforce remains low at 25%. These factors contribute to India’s position as one of the emerging markets most unequal societies with an income share of the richest 1% above the UK, US and China.
(No longer) under pressure
In the near term, the companies we spoke to were turning more optimistic that consumer demand was showing signs of improvement as inflationary pressures eased, particularly for the rural population which is more vulnerable to the vagaries of the Monsoon and food prices.
Slower inflation will also allow for interest rate cuts which is expected to stimulate further demand for credit. However the banks have also noted a fall in liquidity and started to speak about the challenges of faster deposit gathering. This is important because in India corporates have a high dependence on bank borrowing to fund capital investment. This three-way tug-of-war between the deposit, loans and profitability outlook for the banks has dampened investor sentiment in the sector despite the significant long-term opportunities that remain from driving financial inclusion. One of the notable changes since our last trip to India was the increased prevalence of digital payments although unlike China where digitalisation was a private market initiative, in India the government has been much more directly involved to create an open-platform model. Indeed, this was a recurring theme and harnessing the power of India PLC is critical to the achievement of India’s ambitious wealth creation agenda.
Stock-markets have moved ahead of near-term earnings expectations, in part driven by the weight of local investors enthusiastically buying into the local equity story. Whilst this has made valuations hard to swallow, we saw first-hand the quality of management, scale of opportunity and growing innovation of corporate India which makes the market opportunity so attractive.
