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Real reforms rolling out in EM

Serious reforms in key emerging markets are ramping up and going largely unnoticed, according to Mike Sell, head of Asian investments at Alquity Investment Management.
Alquity, which launched Asia and India funds earlier this year, is particularly optimistic about India reforms. After several months in power, India’s new Prime Minister Narendra Modi has taken action, Sell said.
 
Modi’s moves include amending the Factory Act to enable women to work at night and get more overtime for each hour worked, as well as increasing worker flexibility by making it easier for companies to hire.

Bureaucrats put to work

“Bureaucracy is now doing things rather than sitting and doing nothing. Already 400 billion rupees ($65.3m) of road projects have been restarted after being stuck. 
 
“There’s a website you can log onto that shows the names of bureaucrats and whether they’re at their desk. Before, they played golf half the day and had long siestas, so [Modi is] actually making the system work.”
 
The patent office has a backlog of 200,000 cases, which are critical for India’s growth, he added. The government hired 1000 extra people to get rid of the backlog over the next 18 months. 
 
To build a factory, he continued, a company needs permission from the environmental agency to determine if any forests are impacted, Sell said. 
 
But maps that the government uses were drawn decades ago, so even if the factory is proposed for a city, permission still needs to be granted from the forestry committee, even though no forest are involved.
 
“Modi is beginning to get rid of some of the crazy petty rules India has had for the last 50 years.”
 
Earlier in October, Modi’s party fared well in two state elections. 
 
“Now he has more power at the state level and the upper house of parliament whose members come from the states. 
 
“We hope to see him use that power to get more deep-rooted reform coming through. We’d like to see more [legislation for] foreign investment in the insurance sector, which is stuck in parliament. Also, the implementation of a general sales tax and an India-wide tax rather than layers of local and state level taxes, which is a complete mess.”

China defies sceptics

China is improving as well, despite a huge amount of scepticism, Sell said. The relaxation of the one-child policy will add significantly to the population over the coming years. The government also standardized permits that allow people to move from rural areas and live in urban areas. 
 
“Urbanisation is now more palatable. Until now, people who moved from villages to cities were second class citizens, with no access to good schools or good housing. Now all this will change.”
 
He is not yet convinced about the state-owned enterprise restructuring pledge. Sinopac, for example, has taken investment from cronies, which is not in the best interest of minority shareholders, he said.
 
In frontier markets there has also been significant reform. Sell said Vietnam’s government tamed inflation and GDP is already bouncing back. The government created a bank to buy bad debts from troubled banks. In addition, a wave of privatisation is expected.
 
In the Philippines, the government formed public-private partnerships to build much needed infrastructure.
 
“They are spending huge amounts on infrastructure while public debt is declining.”

Oil sweetener

Weak oil prices have been an added benefit for Asian countries. Much of the price drop is due to greater supply, particularly from shale oil in the US. 
 
Sell pointed out that lower oil prices appear to be sustainable even while risks are rising in the oil sensitive regions of Russia/Ukraine and the Middle East. 
 
“This gives us confidence that we will be in an era of low oil prices for the longer term.”
 
The big beneficiary is India, where 37% of imports are oil or refined products, he said. 
 
“The oil price decline will help to reduce the trade deficit and bring a 40 basis point decline in inflation in the near term.”
 
Alquity’s top three weightings are China (19%), India (18.5%) and Vietnam (11.5%). 
 
Sell said the biggest single risk to Alquity’s portfolio is if something happens to Modi, who is the country’s driving force for reform. 
 
Barring that, it’s market sentiment. “If markets behave irrationally and we have a trash rally where all garbage goes up, we’d do less than our peers in that situation.”
 

Part of Mark Allen.