Valuation opportunity in India

Simon Hildrey: Welcome to this video with Ewan Thompson. Ewan, India's had a few years of very strong performance, very strong economic market performance. Can you give us an update on where India right now?

Ewan Thompson: As you say Simon, India has been one of the standout performers for emerging markets in the last few years, particularly post-COVID, at a time where, for emerging market's in general, things have been quite tough, particularly in China, for example, and India has really been the exception to that rule. When we go to last September, that was the aftermath of this huge exercise of democracy that is the general election in India that we saw last year through summer. The reality of that is that there's a bit of a hiatus in the economy. A lot of things slowed down at that point there. The government spending is often on hold during the election season. We also saw extremely hot weather just before and very late and heavy rains after the election, which is ultimately good for the agricultural side of the economy, but it did effectively create a bit an air pocket in growth. So we went from extremely strong economic growth through the first half of the year to something of a slowdown in the September quarter. So that GDP number was quite a bit lower than we'd seen previously. So effectively, we're going from 8.5% growth to a number that was below 6. So that was a bit of a surprise to the markets. That also fell through into corporate earnings. So we saw a somewhat disappointing earnings quarter there. In September, India was one of the more expensive emerging markets, which we think that longer term, and we think the multiples really reflect the opportunity. But in the short term, India was relatively expensive. So since September, we've seen some relative underperformance for India. And then as we've gone into this year, the sort of abrupt rotation we've see in other global markets has happened within emerging markets, and India has fallen in more absolute terms. The encouraging thing is that we're seeing over the last couple of months, a real pickup in that data, which I think people were wondering, is this a the structural story is coming off the rails, or is this something more of a shorter term situation? And the data that's come through recently, particularly the December quarter GDP numbers, which were not only much better than the previous quarter, but also saw lots of upward revisions to the previous numbers that have been a bit disappointing. That really shows that growth is starting to pick up again. And again, the most recent quarter of earnings has been a little improvement there as well. So I think we're starting to see that there's not really much change to the medium term outlook in India, but the market has obviously fallen significantly. I think the final bit to add in there is just what's going on outside of India. India's relatively well insulated against a lot of noise of Trump and tariffs, et cetera. But India has enjoyed a status as really the sort of the one market which people have felt sort of safe in, and now suddenly the reemergence of China has created another story in town. So I think we've also seen rebalancing of flows towards some other markets, which is nothing to do with India. But what India is doing in terms of its own growth, it looks to be stabilising and accelerating in the short term.

Simon So India has been considered quite an expensive stock market. With the fall in the market and the earnings revisions in growth, is India now looking more attractive from a valuation point of view?

Ewan I think this is the dilemma for investors looking at India, is that it's always considered a very expensive market. So it's never going to be on a Korean value multiples. We tend to think it's worth evaluating relative to India's historical premium to emerging markets. It's a very profitable market. Return on equity is much higher than average, so we would expect it to trade at a premium. So back in September, that premium was pretty extended. We're now into average valuations for India. So that doesn't necessarily scream table-poundingly cheap, but again, India doesn't tend to get to those levels. But we are now sort of back in line with where we are historically. So I think that's encouraging for sure.

Simon And you've just recently been to India, you've met a number of companies. What was the mood that you picked up? Did you get a sense of confidence on the ground with the companies themselves?

Ewan I think that really management is just focused on, there's such an unbelievable medium and long-term opportunity in India and really they're just focusing on execution. So a lot of the companies, particularly in the smaller space, there is such an opportunity that a softer quarter here or there doesn't really kind of come across the radar. It almost feels feels silly to be talking about what's happened in the last month, but effectively I think there was certainly a mood of quiet confidence. I think maybe not quite as effervescent as maybe you saw six months ago, but also absolutely no signs that anyone's really concerned.

Simon And did you find new companies to invest in?

Ewan We found some really interesting companies. And I think that when we look at the market now, the interesting thing is because the market's come down a lot, one of the most interesting areas almost is the large cap stocks.] The large caps on valuation terms are now looking pretty good. I mentioned the banks, the smaller banks, the larger banks have really kept out of these asset quality issues and now we're seeing that actually they're on discounted valuation to the market, yet they're growing at the same speed as the market. So that's one area which is particularly attractive at the moment, because as the whole market's come down, some large caps are really going relatively cheap. That said, because the market has fallen off, we're also seeing some of these mid cap companies, which previously were on extremely high valuations, are starting to come down to more palatable multiples. An example would be something like ASK Auto. It manufactures breaking systems, but it's a classic sort of Indian mid-cap company for me. It's family-run, never raised any outside capital since its IPO. It's quietly taking market share, doing technology tie-ups with the best operators in Japan and Taiwan. Adding new value-add products, building margins, extremely high return on capital employed. And they're also growing at twice the speed of the wider two-wheeler market, because they make braking systems for scooters and two-wheelers.

Simon And finally China, you mentioned the re-emergence of China, which has been out of favour. Do you think the stimulation packages that they're announcing and implementing are going to be successful?

Ewan Last September, we start to see, yes, the government finally addressing the elephant in the room, which is that consumption has been relatively weak. In some ways, that is catalysed by the knowledge that Trump is probably coming back and there will be tariffs, which will hurt the export market, and they know that actually consumption is the driver they really have controls overm and need to get that going. So I think initially, there was quite a lot of doubt because we've seen this before, but the steady drip feed of stimulus into the market in terms of liquidity, in terms of addressing property issues, in term of offering stimulus to the consumer, it's actually been very encouraging. And the one thing that China does have in abundance is huge consumer savings. So household savings are at record highs. People haven't had that confidence to spend and we're already starting to see on the economic data, but also on company results, that the consumption sector is starting to benefit.

Simon Great. Thank you Ewan and thank you for watching.