International Adviser talked to David Cornell, chief investment officer at Ocean Dial Asset Management, who specialises in small and mid-cap stocks in India, to find out.
“India is one of the fastest growing economies in the world and [its] growth is beginning to pick up. We’re starting to see productivity improvements as a result of technology changing and as a result of a more market-friendly, reform-oriented government.”
Looking at the country’s track record over the last 30 years, India has been performing well and it has become one of the fastest growing stock markets, “with one of the best returns against any markets historically”, said Cornell.
Small and mid-caps
However, while India’s appeal has been very well known to investors, Cornell believes small and mid-caps are the way to break through the market.
“Ten years ago, China was 13% of MSCI index, today it’s 25%. Ten years ago, India was 6.8% of the index and today it is 9.2%."
“Small and mid-caps do perform better in any market globally. [They offer] an opportunity to invest in companies where the market hasn’t fully realised the value.
“If you invest in Vodafone – everyone knows what Vodafone is – but if you invested in the Vodafone of 40 or 50 years ago, people didn’t really know about it. If you catch it early and you’re confident in the quality of the management and the sustainability of the business model, then you get better value and more growth.”
Government and reforms
Cornell said that his confidence in the Indian markets comes from the fact that the country has constantly performed “in spite of the government”.
“In China [the market performs] because of the government. Of course, a government focused on reform is a great thing, but India will perform either way.”
That isn’t to say that reform isn’t needed, with Cornell flagging up land, judiciary and labour market reforms as some of the most pressing ones, which would allow India to “fulfil its full potential”.
Although they might not be very popular reforms, they could really make a difference. “The first pill is often the nastiest,” Cornell said, “but, once you’ve swallowed it, then things tend to get better”.
Some think that the interest in emerging markets has made India “saturated”, but looking at the MSCI emerging market index it seems otherwise, Cornell claims.
“Ten years ago, China was 13% of MSCI index, today it’s 25%. Ten years ago, India was 6.8% of the index and today it is 9.2%. I would say that India is only at the start of its journey.”
Small and mid-caps, however, are linked to greater investment risk as it is harder to predict how a company will do in the long-term.
Cornell acknowledges the risks these types of stocks can carry; especially after the impact demonetisation had on the Indian market.
He believes that looking at companies through a mix of quantitative and qualitative processes can give a broader picture of the quality of the company and how it could perform in the long run.
“We have a template that goes back 10 years that identifies operating metrics, balance sheet metrics and investment ratios.
“We also have a team on the ground in Mumbai who meet with companies the whole time. Before we put a stock into our portfolios, we track them for a long time.”
Cornell feels most confident in investing in consumer-facing companies because they can be the most “transparent, straightforward and easy to understand”.
“We don’t invest in things we don’t understand like biotech, pharmaceuticals or IT products; we also don’t invest in companies which are connected or dependent on the government.”
For instance, over five years ago, Ocean Dial added Jyothy Laboratories, a manufacturer of household products, to its portfolio.
The company producs a fabric whitener that has been very popular among white-collar workers in India.
“They have a 70-80% market share in that brand and they have enormous distribution across the whole of India and so companies like Unilever or Procter & Gamble will just never compete in that particular market because it’s just too niche for them.”
However, 2019 brings its own challenges. When asked about potential headwinds, Cornell said: “We’ll always be concerned about something. Everyone says it’s a particularly hard time for the market right now, but I think it’s always a hard time.
“Oil prices are a big driver of sentiment in India as they are big importers of oil. If the oil prices go up it has a massive impact on India’s macro economy.
“There’s also a general election coming up next year, where the prime minister is seeking to get re-elected and investors were already worried massively.
“Finally, there’s a banking crisis that’s been ongoing in India for the last four or five years. We’re not quite sure whether we’re getting to the end or whether we’re just reaching another stage.”