To further diversify our global funds geographically, we decided to analyse the investment case for India. India is not only a huge market but also one that is growing rapidly. While we recognised that, like the West, India’s economic growth has faced challenges due to higher global interest rates, it has not been as negatively impacted in relative terms as other major economies.
For the Global Income and Global Equity strategies, our opportunity set is regionally unrestricted. Developing markets offer the promise of higher long-term growth, business model innovation and portfolio diversification. We have substantial exposure to markets like India through developed market listed companies, such as Unilever. However, we hadn’t, until this project, taken an in-depth look at Indian-listed businesses.
We assembled a small group to assess the opportunities and challenges of investing in domestically listed Indian companies and split the streams of investigation between the group.
Our project focused on the following areas:
- Governance and ownership: Bethan Rose.
- Macroeconomics: Rob Strachan.
- Indian companies: Gurinder Samra and Rob Strachan.
Governance concerns are material when assessing a new market, as standards and practices can vary widely and have big impacts on company ownership and incentives, particularly from the perspective of the role of international investors. We reflect these risks in a company’s ESG risk scores and consequently it’s maximum position size. For this project, Bethan analysed structures from a high-level perspective.
Key governance risks highlighted from Bethan’s research were:
- The structure of the ‘promoter’ and family ownership means other shareholders are often in a significant minority. A promoter is a distinctly identified shareholder who may have a controlling interest and is expected to have a disproportionate influence (via voting rights) on board and company decisions, normally with direct board representation. In such scenarios we may experience a dissatisfactory level of engagement. This is not unique. European family-owned companies like LVMH and Hermès have similar structures.
- India boasts the third-largest number of family-owned businesses globally. Among the Nifty50 companies (the main equity market index), 31 are family-run enterprises, contributing a substantial 52% to the overall market capitalization. However, the involvement of families in business operations has been associated with risks such as controversy and corruption. While a significant shift in family ownership is unlikely in the foreseeable future, ongoing discussions are focused on regulations targeting the dynamics of promoter relationships. We acknowledge that scandals are not exclusive to emerging markets, with Hexagon, a Swedish company we own in the Global Income strategy, serving as an illustration of a company having recently faced some controversy around governance and disclosure.
- Challenges have arisen due to inadequate auditing practices, increasing the risk of harming a company’s brand or reputation and consequently shareholder value. As part of our analysis during annual general meetings, we monitor audit tenure and rotation. We uphold all companies to the standards outlined in the UK corporate governance code (where appropriate), which we consider to be best practice.
Any risks should be considered in a wider context, tested from multiple angles, and normally can be managed. For example, on an individual company basis, we do own companies that have an ESG score of a D, but we manage this through active engagement, monitoring maximum position sizes and thinking about other aspects to the investment case. More often than not, a low ESG risk score triggers a ripple effect on other risk scores within our framework. We did the same with this project assessing the Indian market. The key takeaways were:
Macroeconomics
Real Gross Domestic Product (GDP) and GDP per capita have experienced significant growth, with substantial potential for further increase compared to other economies. This is partly driven by India’s large, young and growing population that is urbanising. However, investment returns measured in pounds or dollars are considerably affected by currency depreciation. Additionally, inflation has consistently remained at relatively high levels, amidst the presence of geopolitical risks and significant income inequality.
Indian companies
Our requirements of high return, asset light, cash generative companies with strong competitive advantages resulted in a small opportunity set from our initial quantitative and qualitative screening. We concluded the most attractive names are often subsidiaries of global companies (many of which we already own) with smaller scale domestic competitors. We think strength in nascent categories will likely come under pressure as the markets reach a meaningful size. Rob has analysed Tata Consultancy Services and Hindustan Unilever as new ideas which we will continue to monitor.
Overall, we decided to pause further work on the investment case for Indian-listed companies. Governance considerations formed an important part of this analysis. When taken together with the smaller opportunity set and macroeconomic risks, we were able to form a holistic judgement of the investment case for India. However, given the massive role India is set to play for many of our global holdings, we will be keeping on top of market developments.
Rob Strachan and Gurinder Samra, Investment Analysts
2023
Please note, these views represent the opinions of the Evenlode Team as of 2023 and do not constitute investment advice. Where opinions are expressed, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. This document is not intended as a recommendation to invest in any particular asset class, security or strategy. The information provided is for illustrative purposes only and should not be relied upon as a recommendation to buy or sell securities. Every effort is taken to ensure the accuracy of the data in this document, but no warranties are given.