The Indian Elephant Wakes

January has been a strong month for the Asian markets, and our Bamboo Fund has appreciated by 6.5%, especially reflecting the rebound of Indian shares after the demonetization shock in November/December. Our Indian Ocean Fund at US$75M has also appreciated nearly 5% since its launch in December.  We remain positive on the outlook for emerging markets, especially for India and the subcontinent but also for the growing consumer markets of the 600 million population bloc of ASEAN.  We are looking afresh at Thailand, Malaysia, Singapore, and Indonesia, as well as the Philippines for opportunities in this sector.  We have a nuanced approach to China, which is clearly experiencing some slowdown in exports and nominal GDP growth, but continues to report strong retail sales, travel and tourism figures, and spending on education, healthcare, and on-line purchases.   (We have added Alibaba and Baidu as two leading companies in this space last month.)

The major question is what will happen to the emerging markets in the era of Trump. Has globalization and free trade peaked?  Our view is that, despite short-term setbacks, the long-term trend towards freer movement of capital goods and ideas cannot be stopped.  It is counterintuitive in the age of the internet for people to turn inwards and buy only domestic products.  Britain will not be able to live without French and German imports, nor will the USA, despite the enormous size of its domestic market, be willing to exist without German and Japanese cars and cheap Chinese consumer goods.  The trend of history seems irreversible, and it is, in the end, consumers who benefit most from the competitive pricing of imported goods.

The first few weeks of the new administration have been somewhat chaotic, with the ban on Muslim traveller from seven countries and the uncertainty about foreign and trade policies. The real economic impact of the change of thinking in Washington will be towards reflation, lower taxes, less regulation, more infrastructure spending, and, in general, a boost to the ‘animal spirits’ of the business community.  We venture to believe this will benefit many of the companies that we visit in the Asia Pacific.

Nevertheless, we have taken a very cautious stance in not buying into the export sectors in Japan, China, and Southeast Asia. Strategically thinking, we have focused on India and its neighbors, which have less to lose than any other major developing countries from a US-protectionist stance.  Even in India, we avoid the software and pharmaceutical sectors, which could be impacted by more restrictive trade policies (especially in the technology sectors) where the H1B visa has become very important to Silicon Valley companies bringing in Indian software engineers.

In January, I made a very interesting journey to Hong Kong through northern Thailand to India and eventually Sri Lanka. China’s influence on the economy of the Indian Ocean region cannot be underestimated.  We visited Pakistan in November, which will see US$50B of infrastructure development in the highways, ports, and power generations.  Even more remarkable is Sri Lanka, where the Chinese are estimated to be investing almost US$10B into an economy whose total size is only US$80B.  The new government, with succeeded Mahinda Rajapaksa nearly two years ago, had tried to find alternative sources of capital; but there has been virtually no investment from USA or Europe, and so after 18 months, they have turned back to the Chinese and are now going ahead again with Hambantota port, the highways, and the airports.  Most striking is the 550-acre port city development in the heart of Colombo, which will include offices, commercial and residential space, as well as the port itself.  We can see the impact of this huge investment on the construction sector as well as consumption and also the banks.

Looking forward, we believe the next few months will see a continued momentum of growth in these Asian nations which are belatedly catching up in terms of technology and infrastructure. The impressive speed with which the Modi administration has implemented reform of taxes, banking, and national ID registration, will impact the country’s economy deeply in the months and years ahead.  We have invested heavily into the private-sector listed banks in Mumbai, including HDFC, ICICI, Yes Bank, Gruh Finance, Kotak Mahindra, and Shriram City Union Finance.  These are the companies which, on the ground, are going to benefit most from loan demand, especially in mortgages and corporate lending at the local and retail level in the regions of India.  The gradual inclusion, in the financial sector of the economy, of the 600 million Indians living in the rural provinces, will have a huge impact, not only on the banks but on the sales of consumer goods, on travel and tourism, and on the gradual spread of the internet.  All of these trends we have seen in China in the past decade we are now beginning to see in the vast Indian subcontinent.

 

 

 

 

Robert Lloyd George

10 February 2017

Hong Kong