India’s stockmarket recently fell 10% in one day but it was only a correction, says Arun Mehra, manager of Fidelity India Focus, and the country’s growing prosperity suggests he may be right.
It was panic outside Jeejebhoy Towers, India’s stock exchange, as the market fell faster than at any time in its history. In one day, January 22, the Sensex index fell by 10%, prompting a halt in trading and fury among thousands of small investors drawn into the market in recent months.
Is this a sign that the great Indian equity boom is finally over, or just a necessary correction in a momentum-driven market?
The critics say that falls were inevitable, after a 70% run-up in the index during 2007. More seriously, they argue that the “decoupling” theory advanced by emerging markets enthusiasts is false and that India will suffer as America goes into recession. What’s more, the downturn will be made worse by the recent rise in the rupee, which will damage exporters. Foreign portfolio investors will also turn tail, kicking away one of the market’s fundamental supports.
The optimists say, yes, a correction was indeed inevitable, but will only be temporary. The domestic economy is on a secular growth path, boosted by infrastructure investment and private consumption. India’s teeming population has only just started to earn and spend, and the possibilities are phenomenal.
In the second camp is Arun Mehra, manager of Fidelity India Focus, a Luxembourg-listed fund that across all its different currency classes is now £2.4 billion in size. Mehra is not in the least concerned about the recent sell-off, and indeed seems to welcome it. Perhaps that’s because his fund was trailing the index for much of 2007 as he avoided what he saw as expensive construction, property and engineering stocks in favour of consumption, financial services and IT.
Performance was not that bad – there will be few angry letters from investors who over the past year have enjoyed a return of 55% and over three years are up just shy of 200%.
Mehra is confident that his early move out of momentum-driven stocks, while costly on performance in the last quarter of 2007, will soon start to pay off. “Over the last couple of months, the market became really polarised, with prices for infrastructure, engineering and property stocks defying logic. As a value investor, I took that as an opportunity.”
Like all Fidelity managers, Mehra follows the mantra of bottom-up stockpicking with value as the key driver. He is predominantly invested in large cap stocks but has a not insignificant exposure to mid caps too, helped by Fidelity’s team of Mumbai-based analysts. He says: “We have a big team on the ground, and a huge advantage of being one of the first major investment managers to set up in India.”
Since the fund’s launch in October 2004, he says, the stock opportunities have expanded significantly. “Back then, for example, media was non-existent. We have also seen hospital companies listing, and large numbers of telephone and property companies.”
Visiting India over the past two weeks, I could not but notice the explosion in mobile phone use, with 7m subscribers added every month.
Tata Motors’ small cars are increasingly in evidence. Tata is the company that launched the £1,250 Nano car to a mix of worldwide acclaim and horror at the thought of a billion Indians buying cars and all that means for the environment. It is also a stock held by Mehra. “If you look at the shape of spending in emerging markets, it follows a similar pattern,” he says. “As soon as household incomes rise above $1,000 [£500] a year, there is a huge expansion in spending on things such as mobile phones, property, cars and eating out.”
Mehra says the consumer boom is already radiating out of the biggest cities and into the “second tier” urban areas. “When we launched we said this was a long-term story and this was just the start,” he says. “Even we have been surprised at how vigorous growth has been. Consumption was limited to small sections of the urban population but now it is being passed across India and is even reaching the villages.”
But will growth not be stunted by a drop in demand from India and Britain, especially in the technology and outsourcing industries? “Look at the last economic slowdown in the West, the one that followed the end of the TMT [technology, media and telecoms] boom in 2000,” says Mehra. “Then, people said it would hurt the IT sectors in India. But they still grew by 20-25%.”
He says that Europe and Japan are only beginning to focus on outsourcing and are likely to pick up the slack from falling demand in Britain and America. But he also points out another support for Indian IT: when times are tough in the West, managements become focused on cost cutting and take the tough decision to transfer work abroad. So an American and British recession could, oddly enough, benefit India.
Mehra has Infosys and Financial Technology in his top 10 holdings, with the sector making up 17.4% of the fund.
Financials are his biggest single area, at 23.6%, led by his holding in ICICI. He plays consumer discretionary spending through stocks such as United Spirits. It is already the second largest spirits business in the world behind Diageo and bought Scotland’s Whyte & Mackay for £595m. In the “dry” state of Kerala, where I was on holiday, beer is discreetly served from teapots and sales are banned on pay day to avoid the workers drunkenly washing their earnings away. But it doesn’t seem to have hurt United Spirits, as India has grown into one of the world’s largest markets for alcohol.
As a visitor, it is impossible not to notice the signs of prosperity. But there are still colossal problems with India’s infrastructure and bureaucratic chaos prevents fast solutions. Environmental degradation is destroying large parts of the country and, unlike China, Delhi will not accept that it has to act. But India’s economy is in take-off mode, and it’s not even yet at full thrust. At a price/earnings multiple of 18, the market is expensive right now, but later in the year it will be time to put clients back in.