After a number of buoyant years for India, where the economy and stock market have both seen significant expansion, recent times have been tougher 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 Sanheevi, senior investment manager on the Pictet Indian Equities fund, said 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 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,” said Sanheevi.
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.
Sanheevi 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 to the problems affecting emerging markets more broadly. Added Sanheevi: “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.
Net importer
For Sanheevi, the macroeconomic picture is an important input into the group’s process, which involves stock-picking 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 a key pillar: quality, at the right price. Sanheevi adds: “We are bottom-up investors, believing that companies should be well-managed and of 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 it treats 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, over the years, the fund has struggled to find companies in the energy and telecoms sectors that have met its criteria. Companies within the sector have tended to have a poor return on equity.
As a result, the fund has been underweight these areas for a long time. In contrast, Sanheevi 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. Sanheevi 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 said. “We want to ensure 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. “Stocks were expensive, particularly in some of the small- and mid-cap names. In this environment, it was difficult to find good ideas,” he added.
Today, it is a different picture. Although, at 17x, the market is not cheap, 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,” said Sanheevi.
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.
Sanheevi said he believes valuations today are far more realistic, which has left the Indian market looking attractive once again.
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