Emma Wall: Hello and welcome to the Morningstar Series, 'Why Should I Invest with You'. I'm Emma wall, and I'm joint today by Jonathan Schiessl, Manager of the Ashburton India Equity Opportunities Fund. Hello Jonathan.
Jonathan Schiessl: Hello.
Wall: So, a couple of years ago, everybody was picking India as their top market, the one to watch and that's because there had been seismic political change. However, it hasn't been subsequently done very well after an initial rally, has it?
Schiessl: Yeah. So, I think clearly expectations are very high. Modi comes into power, everybody is expecting suddenly things to be changed in an instant. Clearly that didn't happen. He's been putting a lot of building block in place, a lot of reforms in place that typically take a little bit of time before they start materializing.
The reality is though – and we had two – he came to power three years ago, India did well that year and then after that you saw quite switch in emerging markets away from the likes of commodity consumers like India into some of the more beaten up emerging markets like Russia, Brazil, the commodity producers.
As we saw the rise in commodity prices over the last year, year and half, they outperformed and actually India fell to the wayside and actually year-to-date, it's catching up again. So, it's more catching up trade than actually outperforming.
Wall: So why now – why is now a good time? Why is now the reason to get invested in Indian equities?
Schiessl: So, India is a fantastic top-down and bottom-up story. So, the top-down side is really very simple, and it's not a great complex export story or reliant on global growth or whatever. It's very domestic, and it really comes down to two main factors to my mind.
Demographic, it has a growing young population, that doesn't peak out till, it's estimated roughly 2050. And when you've got a growing working age population, what that's telling you is actually there is less people that they have to carry, so less young and less old proportionately. Therefore, their propensity to consume increases and their propensity to take risk to invest also increase. So, that's one factor.
And the other factor is urbanization. So, India today is 70% rural. Over the next 20 to 30 years, we are expecting hundreds of millions of people to leave rural areas and go to urban areas, and generally historically when that happens, and economy gets a huge productivity boost. So those two factors alone make quite confident of the top-down big picture story is very much in place.
And the final factor is the quality of the companies. When you look at Indian companies versus other emerging market companies, we can genuinely find world-class management, world-class business opportunities. So, that's what makes us excited is the top-down and a bottom-up story.
Wall: Well, I think that second part is very important, because we constantly hear about how emerging markets are growing at a fast pace than developed markets, but unless you can find suitable investments, it doesn't really mean anything for anybody's portfolio.
Having said that, because of the quality of those companies, quite often Indian stocks comparable to say other emerging markets can be expensive. Can't they?
Schiessl: I think that's true. So, you're paying for two things; for the growth opportunity, which is great, but you can find that at another – other emerging markets. But the point is, when we as foreign investors, domestic – sorry, when we as developed market investors, which is what we are, when we invest in these economies, we are minority shareholders.
So, I think sometimes there is a dislocation. People don't understand who they're sharing the shareholder register with. By that what we mean is, usually in emerging markets, there is two main owners; it's the state. And the trouble is, if we as a foreign investor, buy a company, there is majority owned by the state, a lot of the troubles over time usually happen. In that the company will take a decision in the interest of one shareholder, which is the state and it isn't necessarily very efficient from a capital allocation perspective. So, we have to be very careful with that.
And secondly, the other thing you get in the emerging markets is, you invest with entrepreneurial families, who might have been listed recently or even around for a long time. And it's a similar sort of problem. Some of these families, yes, they have a minority now, but they still run the companies that belongs to them.
And the net effect of both of these issues is that the great top-down story that you can find in India, the benefits will accrue to that majority shareholder. And unfortunately, the minority guy is left to one side. So, what we try and look for a company is, well, yes, we have to align ourselves with usually an entrepreneurial family, but the great thing about India and the reason why it is expensive is we can find companies, which treat the minorities properly. And, therefore, that great top-down story accrues equally to the majority and the minority shareholder. And for that reason, they are generally quite expensive.
Wall: Jonathan, thank you very much.
Schiessl: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
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