India has been one of the most attractive emerging markets for some time, partially because of its status as a member of the BRIC quartet along with Brazil, Russia and China.
However, all of these core emerging-market plays have their own challenges. Data continues to point to a slowdown in China. Brazil is suffering under inflation and stagnant growth. And Russia … well, things are OK, but the IMF is worried that the Kremlin underestimates the crash potential it faces right now.
So should you give up on emerging markets? Probably not. With America and Europe in dire straits too, you can’t afford to limit your scope. Investors these days need emerging-market stocks more than ever — so long as they have the discipline to find the best opportunities and be selective.
I recently had a back-and-forth with Adrian Lim, the brains behind one of the top India vehicles out there. This closed-end fund — aptly and simply named The India Fund (NYSE:IFN) — is managed by Aberdeen Asset Management Asia.
Lim joined Aberdeen in December 2000, working previously at Murray Johnstone and at Arthur Andersen advising clients on mergers and acquisitions in Southeast Asia. He moved on to the Asian equities team in July 2003. He attended university in Singapore and is a CFA charterholder.
Here’s what Lim had to tell me about the state of the Indian economy, some of the best individual equities investors should watch and how his fund is cashing in on growth in this emerging market:
Q: India’s growth rate likely will hit a 10-year low in 2012. It’s obviously a complicated mix of causes, but what are the biggest issues in your opinion?
A: The global slowdown has hurt external demand, but India’s economic downturn has been largely of its own making. High interest rates are needed to contain stubborn inflation, but they in turn deter consumer demand and investment. At the same time, the weak rupee makes imports more expensive, aggravating price pressures and limiting room for monetary easing.
Policy inaction and a hostile investment environment have been equally unhelpful. The ruling Congress party has caved in repeatedly to vested interests among its coalition partners, thus weakening public confidence in its leadership. To counter the slide, it needs to support investment and push through economic reforms, which are sorely lacking as highlighted by recent protracted blackouts and overstretched public finances. The appointment of experienced, pro-reform Palaniappan Chidambaram as finance minister has been widely welcomed by business groups, but we are taking a measured view; Delhi’s indecisiveness has been frustrating.
Q: There’s always talk in America about a “do-nothing Congress.” How is government in India, the largest democracy in the world, similar to our own political mess?
A: India’s political structure is broadly similar to that in the U.S. But unlike the U.S., where there are two dominant parties, India has a plethora of political parties, which are sometimes divided along the lines of religion, caste and language. Because national elections rarely produce a clear mandate in favor of a single party, coalition governments are increasingly the norm in India. Unfortunately, multi-party alliances — where smaller parties can prove disruptive — have in large part resulted in an absence of clear policy direction and forced a series of policy U-turns ranging from foreign investment in the retail sector to rail fares and petrol prices.
Q: Despite challenges in India, there obviously are opportunities if you know where to look. What are some sectors and specific companies you believe best illustrate the potential?
A: As bottom-up stock pickers, sectors are a secondary consideration to our investment decision-making — stocks come first. Specifically, we look for conservatively managed companies with solid balance sheets, sustainable business models and stable growth prospects. And India really does have some of the best companies in Asia and globally.
We have large holdings in the likes of mortgage lender HDFC Bank (NYSE:HDB) and ICICI Bank (NYSE:IBN) among financials, as well as big positions in consumer names such as Hindustan Unilever, a wholly separate stock that is listed in Bombay but 52% owned by British-Dutch consumer giant Unilever (NYSE:UL), for which it is named; ITC Limited, an associate of British American Tobacco; and Godrej Consumer Products, the country’s biggest home-grown consumer goods company. A burgeoning middle class with rising disposable incomes bodes well for these companies.
Another chunky position is in the IT services sector, where we have substantial exposure to Infosys (NASDAQ:INFY) and Tata Consultancy Services. These companies are globally competitive with world-class software engineering teams and generate healthy cash flows.