Peter's Perspective
11th December 2015 by Peter Churchouse

One Bright Spot in Emerging Markets

I’m sitting in India’s technology Mecca, Bangalore… one stop on an India-wide tour to catch up with old friends, make new ones, and do a little on-the-ground research into one of the world’s fastest growing economies.

Sitting here reminds me of an interesting comparison I heard earlier this year. It was about China versus India, the two heavyweights of developing Asia.

The suggestion was that whilst China’s government structure and highly centralised controls are extremely well developed and efficient, its private sector is still in a state of in infant confusion.

In India, by contrast I was reminded, the private sector is vibrant, organised, and dynamic. But its government is shambolic, dysfunctional and chaotic.

It rang true at the time. But being back on the ground here in India after a few years absence and experiencing this country first hand again, it feels like an even more astute observation.

Simplistic? Yes. But true…

In China, services normally provided by the public sector are highly developed, efficient, in abundance. Roads, railways, electricity, ports, mass transit systems have blossomed in China.

A massive, centrally coordinated government drive has cracked the whip on all manner of state owned apparatus to build out huge infrastructure facilities.

It has been a huge driver of economic growth.

But as I make my way around potholed roads in India’s tech capital, trip up endlessly on its broken pavements, I cannot help but draw the contrasts. India’s infrastructure is in a sorry state. Although it’s an awful lot better than when I first started coming here years ago. (The photo below is from a stop I made Delhi on my India tour.)

Peter doing his due diligence investigating opportunities in Bangalore, India (2015).

Somehow, its private sector from the lowest levels to the highest echelons of business are thriving and providing huge stimulus to growth, jobs, and incomes. They have had to. There is little support from the state – unless you happen to be employed by any one of a vast array of government organisations.

I visited a friend-of-a-friend in a large multi story building that is home to a variety of “cooperative” space operations. It houses dozens of exciting entrepreneurial start ups.

The atmosphere there was electric, contagious. Pure, unbridled enterprise. These guys were working hard. I could envisage some successful new businesses being created there and then.

I have long been a sceptic on India’s growth and investment prospects. I didn’t “cheerlead” the election of Prime Minister Narendra Modi to the same extent as many in the financial community.

But there are good reasons today to be putting this market on your investment radar screens once again.

You see in China we have made money BECAUSE of government’s outsize roll in the economy.

In India we have made money IN SPITE of government’s role in the economy.

Modi and perhaps even more importantly, Raghuram Rajan as head of the country’s central bank, are making progress. They are at least trying to pivot the public sector more to help rather than hinder economic growth.

Stepping back for a moment, emerging markets have been a pretty grim sector for portfolios over the past couple of years.

We’ve sidestepped most of that misery in our Churchouse Letter calls. We’ve only recommended 2 broad EM Asia investments: the Philippines and Vietnam.

Our Philippine call has outperformed the broader EM index by 25%.

And whilst we dropped our Vietnam recommendation after it sadly converted into a mutual fund (which we don’t cover), it has outperformed EM by over 30%.

Why the EM misery in general? There are 2 common threads here.

First, many are highly dependent on commodity exports. And we know what’s happened in that market of late. It’s been a bloodbath.

Brazil, South Africa, Russia, Indonesia, Malaysia, Nigeria, the Middle East all have suffered at the hands of falling energy and commodities prices.

Second, many Asian EM’s in particular, are now the world’s manufacturers and exporters.

And global trade numbers have been dire. So the likes of China, Taiwan, Korea, Thailand, and Malaysia have been hurting from anaemic exports.

But India as a large EM does not fit into these two typical EM camps.

It is certainly not a commodities exporter of any note. In fact it benefits from low commodity prices. Also it is not a huge exporter. It did not become an Asian “tiger” economy like China or Taiwan.

Its economy is still largely domestically driven.

And that provides some immunity from the trials and tribulations of the developed world and commodities markets.

I’m certainly not the first, and won’t be the last… but I am taking a bigger interest in India than I have for some time right now.

It has many of the ingredients that will make it a stand-out in the emerging world over the coming year or two. And that’s aside from the fact that it’s growing at almost 8% annually right now.

It seems to finally be getting its domestic macro house in order. And that is important. The government budget deficit has been steadily declining recently. The current account deficit has been also declining. That suggests that downside risks for the currency may be reducing.

Gross debt to GDP is around half of China’s. Inflation has been easing, giving scope for further interest rate cuts.

And then there is the demographic dividend. India’s working age population is the fastest growing of the top ten emerging economies at around 1.7%.

China’s is now declining at around 0.1%.

We covered the importance of demographics in our last edition of The Churchouse Letter and will be releasing part 2 later this month.

I recommend you look at overweighting any of your broader EM exposure into India.

There’s one sector in particular that I think will do very nicely in the next 1 to 2 years and I’ll be covering that in next month’s edition of The Churchouse Letter.

In the meantime, I wish you a Merry Christmas,

Good investing,

Peter

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