Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm here with Kunal Desai, Manager of the Neptune India Fund.
Hello, Kunal.
Kunal Desai: Hi, Emma.
Wall: So, India has been a star performer and continues to be the hot pick among multi-asset and indeed, global equity fund managers. There's a lot of bad stuff going on in the world, but India has been a bright spot. What has driven that performance so far?
Desai: Well, I think kind of the story for India really changed in the beginning of 2014. There was a general election and what it provided was the strongest Indian governments in a generation for 30 years. Now, India has always been a market where companies have grown in spite of the government. But for the first time in 30 years you had a pro-market, pro-business party, the BJP, who led with an absolute majority.
So, I think global investors have warmed to India because it's now seen in a reformer slate and really driven by this change in politics and the change or the fall in political risk premium. So, for us, that's very much been the story over the past two-and-a-half years, reform, pro-business policy and also central bank, proactive central bank, policy which has supported the market.
Wall: And is that enough to continue to drive it forward because of course some gains have already been made?
Desai: I think that's completely the right question when we look at India today. Now, over the last couple of years, it's outperformed both world markets and emerging markets by a healthy margin. And as I said, that relative outperformance has been driven by macro being strong and also the reform agenda being very busy and aggressive. But for us, today, I think looking at India in the lens over the next 18 months to two years, I think something more is required.
And for us, whilst those two arenas of macro and reform are very much hygiene factors for the market, support the market in times of global stress, for absolute returns to return I think it's very much down to corporate earnings. So, us at Neptune, we certainly believe that the key driver for the market over the next 18 months to two years is corporate earnings and this is an area which we're particularly positive on.
Wall: And you do see that coming through. It's not sort of (indiscernible) got a dream?
Desai: Yeah. So, there's three things which have kind of materialized in India which come very rarely together for any emerging market. The first thing is that there's excess capacity. So, companies' utilization is around 70%, 72%. On the other hand, we're now seeing demand coming through.
So, when we look at the lead indicators for demand, be it credit growth, PMI, IP, job creation, airport traffic growth, et cetera, we're seeing green shoots now emerging. Now, if you think of yourself as a company sitting on excess capacity, with demand now coming in, that's operating leverage and that goes straight to your bottom line, rising margins, rising earnings.
But the final point, which I think is very rare in an emerging market's investment cycle, is companies have been stung and they are showing extraordinary amounts of balance sheet restraint. So, while we're seeing margins pick up and earnings picking up, that's not being reinvested back in the ground by way of CapEx. So, really the Holy Grail of all emerging market investing is rising return on invested capital.
So we're seeing returns moving up, but the invested capital base is still staying low and that's why we think it's a very fertile ground for an improvement in profitability and return on invested capital.
Wall: Kunal, thank you very much.
Desai: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
