People, look East
Robert Hepworth reveals some insights from his trip to India and Singapore and discusses why this region should feature in a charity’s investment portfolio
KEY POINTS
- Look East for new investment opportunities
- India’s positive demographics are offset by high inflation and debt
- The strong work ethic is good for GDP growth prospects
My recent return to India, after a four-year interlude, revealed a country that now appears more certain to challenge China's growth in average living standards over the coming years. The trip also took in Singapore, a country of great interest to our investment team here at Ecclesiastical. The opportunities and challenges facing both countries make it an interesting time to examine the possible investment opportunities.
Challenges to India's economy
The combination of much improved demographics (see Figure 1) and a significantly larger and vibrant private sector in India (which represents 90 per cent of the economy compared to China's 30 per cent), points to an inevitable cross-over in relative GDP growth rates for the two countries. What looks like a promising outlook for India does, however, mask several issues that continue to dog the economy.
In the near term, India's growth rate appears more likely to slow down as high inflation has resulted in its central bank raising interest rates eight times in the last year – the most aggressive policy response in the region. While food inflation has fallen from its peak of 20 per cent in early 2010, it remains stubbornly high, causing hardship and resentment among the public.
Indian property prices also look susceptible to weakness given the massive gains seen in recent years, with affordability measures now looking stretched. Land and property generally continue to represent a major problem for India with only three per cent of the world's land mass but 16 per cent of its population. The problem comes to a head in the large cities. In Mumbai, where 70 per cent of the land is occupied by slums, much-needed modern property and infrastructure investments are being delayed as slum dwellers' occupation rights frustrate new development.
Other factors which weigh against Indian stocks include the absence of the strong corporate savings culture evident in most other parts of Asia. Indian companies have heavier balance sheets as a rule and recent interest rate hikes provide a good reason for caution. The 'promoter' issue, whereby a founding family of a listed company may have other business interests which are not always kept at an appropriate arms length from the listed vehicle, is also still alive and kicking. Unclear holding structures and corruption also, sadly, remain an issue for India to address.
At the macro level, the Indian stock market continues to trade at extended valuations compared to the region as a whole. Price earnings ratios, dividend yields and price-to-book ratios suggest a market that is 30 to 50 per cent more expensive than other fast growing countries in South-East Asia. See Figure 2 for a snapshot of the Mumbai Sensex 30.
Right place, not quite the right time
So while a number of interesting opportunities were found (where further due diligence is being conducted), the timing of significant Indian stock market investments does not yet appear propitious. However, we definitely consider India to be an exciting longer-term opportunity and absolutely a market to continue to monitor. As the global economy becomes less manufacturing based and more knowledge intensive, our belief is that democratic India's catch-up potential will drive levels of growth beyond that experience by its trading (and cultural) rival, the People's Republic of China.
A word on Singapore
My visit also took in Singapore, where my company visits mostly centred on small and mid-sized companies, and they provided many reasons for optimism.
I am attracted to the country's strong and stable legal system and robust accounting standards which are sometimes lacking in the region as a whole. The outward-looking and cosmopolitan city state is continuing to develop as a regional hub for sectors as diverse as healthcare, financial services, leisure and electronics. The country's finances are in order, unemployment and consumer debt levels are low, and its banks are in good shape. This has helped to provide the necessary conditions for Singapore to emerge out of the financial crisis with one of the world's fastest GDP growth rates. Moreover, its close links to both India and China provide good reason to be optimistic about future opportunities too.
The investment view
The trip has provided some good ideas which may influence our stock selection in the future. We take a long-term view, basing our investments on global economic trends and fundamental analysis. The rise of Asia has been a dominant theme of our times, and will continue to be so as the balance of economic and political power shifts from the West to the East.1 Attractive investment opportunities can be found in the advanced economies, such as Singapore and Hong Kong, the rising giants China and India, as well as numerous other countries in the Asia-Pacific region such as Vietnam, Malaysia and Thailand. However, the ethical screen that applies to our funds also plays a part, meaning that we do not currently invest directly in China.2 We do, however, look to access the success of China in a socially responsible way, particularly through companies domiciled in Hong Kong.
Although individual countries vary, our positive outlook is underpinned by certain themes characterising the region. Taking a long-term, macro view, Asia has a young population, low dependency ratios and abundant supply of labour, while the standard of living is rapidly improving and GDP per capita is converging with the West's. Furthermore, the population is characterised by a strong work ethic and high standard of academic achievement, a crucial factor in progressing from low to high-skilled economic activity.
Importantly, debt levels are low and banks are well capitalised, unlike their ailing Western counterparts – a sound banking system is essential for robust and sustainable economic growth. Government policy also tends to be prudent, taking a long-term rather than opportunistic view. Finally, there are indications that reliance on exports is decreasing, and domestic consumption is beginning to drive growth.
Despite the fundamental tailwinds in the economy, the region's equities are attractively valued. The MSCI Asia-Pacific ex Japan index trades on a 12-month forward PE ratio of 12.3, compared with the global average of 12.4.
Some stock tips for Asia
There are several companies that really stand out in this region, and could make valuable additions to an investment portfolio. The first is China Minzhong Food, a Chinese integrated vegetable producer, poised to benefit from continuing urbanisation and rising demand for packaged vegetables across the region. The company runs the entire production cycle from growing the vegetables to processing them, and produces high-quality products which are exported to international clients such as Carrefour. Its organic foods segment is being actively developed to benefit from growing global demand.
A very different, but equally intriguing company is Goodpack, a Singapore-based company with a global reach. It owns and rents out the world's largest fleet of intermediate bulk containers (returnable steel boxes) for the transportation and storage of cargoes. It is a well managed, market leading company with a strong product and loyal customers. Containers have environmental advantages over wooden crates and steel drums, and are well-suited to further industries. Goodpack is also on the verge of expanding into auto parts, which could add significant value to the business.
Looking to the future
UK charities are under pressure, both to generate sufficient income to fund their day-to-day activity and to ensure they can maintain this longer term, through capital protection and growth. With these requirements in mind, Asia is, in our view, a very powerful story for the long-term, with its favourable debt levels compared to the West; there is great growth potential and plenty of good companies providing strong dividend flows. As part of a balanced portfolio, which also includes carefully chosen stocks closer to home, charities’ short and long-term requirements can be achieved.
1. See also: www.charitiesdirect.com/caritas-magazine/another-country-712.html
2. For more information on socially responsible investment, see www.charitiesdirect.com/caritas-magazine/ categories/sri-roundtable-september-2010-419.html
Author: Robin Hepworth
Robin Hepworth is chief investment officer of Ecclesiastical Investment Management and manager of seven funds, including the Amity Balanced Fund for Charities and the Amity Global Equity Income Fund for Charities (which is co-managed with Chris Hiorns).
His career at Ecclesiastical spans over 20 years.
www.ecclesiastical.com/fororganisations/investments/index.aspx
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