Adrian Lim, Senior Investment Manager, Aberdeen Standard Investments
May 11, 2018 | Source: Mint
The FII has in place a very diversified strategy for rural India.
On earnings: So far, the results have been mixed. Some of the IT companies have been delivering quite decent growth numbers on strengthening customer base. But it is very difficult to call a particular trend. We are still seeing a lack of re-investment of capital expenditure across different sectors. Financing continues to be a problem because the financial system still needs some time to recover and to recapitalize its balance sheet. Not all banks are going through this challenge but it is enough to say that we cannot generalize across the banking and the financial sector. It is a mixed environment as we expect it to be.
India has underperformed the emerging markets of late. What factors do you think are at play here? It is very difficult to generalise and compare. There are periods of time when India has outperformed the emerging market space through no credit of its own but because the emerging market space has been challenged by other issues. I would look at India on a standalone basis. One of the key challenges with India recently has been the introduction of the capital gains tax over long-term capital gains and that has made the hurdle race for returns higher than we would otherwise be accustomed to. You have to compare India investment case across the region with other countries as well and this capital gains burden is not something that other countries or jurisdiction subject investors to. So, that is one of the issues. The second and the third issues are more fundamental in nature. There remains quite a lot of over-capacity within the system and that needs to work its way through. There has to be debottlenecking of certain projects. There has to be a genuine recovery in demand across not just the public sector but across the private sector and industries as well.
Surging Crude Prices: Energy prices are always a decisive factor for countries like India where we a lot of fuel is imported. The government has done a good job being as prudent as it can. The introduction of GST was good. It widens the tax base and tax net and it is also very useful in terms of simplifying businesses and bureaucracy across state and federal lines. The implementation is difficult, a challenge that cannot be underestimated. However, GST has been a strong deliverable by the government.
The theme of rural recovery: What is important is that the rural strength will come into play over the next decade or so, Not all of that is commercially viable at this point in time but the better quality Indian companies have got rural strategies and they have a long view in mind and we welcome that. It is important that the infrastructure and the network reaches out into rural India but we also need to recognise that we need to be more patient and some of these investments will not pay back within the next year or two or three years even. But that is something that good companies with strong balance sheet can take a measured call on and invest in. We would encourage that. Rural is important and it is something that we need to encourage and have some exposure to in our portfolios.
Cement Space: We like the cement companies but the sector has had a very chequered shortterm history. It is quite region specific too and it is too early to call a sustainable recovery in cement yet. There is still quite a bit of overcapacity. Utilisation levels have solidified to some extent but not enough to encourage too much optimism yet. It is something that is nice to see over the recent quarter but we would not call it a strong, sustained recovery quite yet.
Consumer business: They have been investing in the rural market space and quite a lot of those things will take some time to work their way out. The valuations are not cheap. They are quite demanding and that is true of the consumer staple space. We want some exposure there but we must be very selective. If things were 20% cheaper, we would buy more.