Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Dhananjay Phadnis, Manager of the Fidelity Asia Focus Fund.
Good morning, Dhananjay.
Dhananjay Phadnis: Good morning, Emma.
Wall: So, I thought we could talk about India today. I know you have a whole of Asia remit and you are able to invest across the region and there has indeed been a lot in the press about China recently. But India remains quite an interesting investment case not least because we have some upcoming elections, don't we?
Phadnis: Yes. India has always been one of those stories which are very remarkable in that the potential for India is enormous as you look into the long-term. If you look at one of the interesting facts recently is that India is now the sixth largest GDP, country by GDP, and it's expected in the next two years it will actually overtake the U.K. to be number 5. So, there's a lot of progress happening. But even at that level, India's per capita GDP is only $2,000. So, it shows you that the potential for long-term growth in India, whether it's consumption, infrastructure, health, is just enormous.
Wall: And in the past, India has been rather stifled by bureaucracy, hasn't it? But now, you've got a single-party government, you've got interesting reforms coming through. What changes has the country made that have made it easier to invest in the region?
Phadnis: Yes. So, India is still a very complex country and it's many different states which come together. And you are right that this government has a majority in parliament which has helped it with some reforms like the Goods and Services Tax, the GST, which has been implemented sometime ago. It had the teething problems, but now it seems like things are settling down. And there's also a lot of push by the government around some sectors like property.
So, they are trying to boost property through a lot of tax breaks for people to buy affordable property. So, a lot of different things happening. It's, like I said, still a complex country, but it looks like a lot things have come together in the last few years.
Wall: And how as an investor do you take advantage of this positive movement in terms of reform, because the macro, an economic and political is one thing, but actually, making that into an investment case is quite another, isn't it?
Phadnis: So, I do look at very much bottom-up stock picking and while stocks are very different, and companies are different, you can't ignore the fact that the strength of the economy or the direction of the economy is quite important for underlying earnings. And some of the secular trends, like I mentioned, consumer is a secular trend in India, that will continue.
I think the pace of change is driven by some of the things happening at the economy level as well as a lot of the pushes that the government can make, which is, healthcare and infrastructure and property. So, a lot of things are coming together. And in fact, after a long period of disappointing earnings revisions, for the last several months, we are beginning to see a positive uptick in several macro indicators, whether it's automobile sales, or it's property sales and we are beginning to see some green shoots picking up.
Wall: And how are valuations in that country, because there's a lot said about the developed world, the valuations looking very high and a few years ago, India after the post-surge of Modi being elected also looked quite expensive. Do you think this is an interesting entry point or are things fairly valued?
Phadnis: India always looks expensive considering the conventional lens of looking at and comparing with different countries. For example, India right now on a 12-month forward basis trading almost close to 18 times which is quite expensive in the global context but what it means also is that investors believe and look forward to the long-term growth story in India which is why they are willing to pay a premium consistently over the last many years.
So, while valuations are not very cheap, I think the real question is, can earnings live up to their expectations.
And here, I have a little bit of a concern because valuations while where they are, earnings expectations are quite high as well. So, we are expecting high-teens or even 20% earnings growth for the next few years, which is quite a tough ask and we will have to see how the companies deliver on that.
Wall: And you say though yourself you are a stock picker, you do look bottom-up. So, these sorts of whole of market figures might not necessarily apply for someone like you where you are a stock picker. Where are you seeing the best opportunities?
Phadnis: So, I have been very much focused on large-cap stocks and I still see a lot of the opportunity in large-cap stocks. In fact, if you look at mid and small-cap stocks in India, they had become very frothy and expensive over the 6 to 12 months. What we are seeing year-to-date is a clear change where mid-cap stocks are down almost 15% but large-cap stocks are actually flat to up as a whole.
What you are also seeing is that there are positive earnings revisions in the large-cap stocks versus the mid-cap stocks. This is the area where I invest in, which is mainly large-cap stocks and within the large-cap stocks you find many companies which have earnings which are export driven.
So, the IT services companies or the oil and gas companies as well as the healthcare and pharmaceutical companies. So, there's large sections of the market which are domestic-linked but there are also many industries which are export-linked. That coupled with some of the economic recovery we are seeing is beginning to feed through in earnings. So, I'm finding some really interesting stock picking ideas despite the more expensive valuation when you look at it from a top-down perspective.
Wall: Dhananjay, thank you very much.
Phadnis: Thanks, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
