As our focus is finding companies with a sustainable competitive advantage and top tier management teams, we are often asked “why invest only in India?”
One answer could be that being immersed in a business culture unique to India, with its own idiosyncrasies, brings long term advantages in assessing corporate governance standards and business models that are solving problems unique to domestic consumers and enterprises. Whilst we believe this to be true, it is hard to demonstrate due to its intangible nature. Instead we ask back – “where else would an active investor looking for high quality but mispriced companies like to focus?”
The first justification for answering “India” is its breadth and depth of top quality management teams across sectors and the market cap spectrum. India has globally competitive companies in industries such as IT services, pharmaceuticals, petrochemicals and hospitality to name a few. These companies are the likely winners in a highly fragmented and consolidating arena. The market offers patient, research driven investors a broad base of top class entrepreneurs to choose from as well as the opportunity to identify newer generations of management talent amongst older enterprises.
Beyond this, the size of India’s economy means that businesses that have managed to navigate the country’s idiosyncratic hurdles to build scale have significant competitive advantages. This has allowed them to enjoy superior returns profiles as evidenced by the twenty-five year average Return on Equity for the MSCI India Index of 17.6%, in Rupee terms(1). Due to historically being a capital constrained economy, efficiency and allocation of available capital have been at the forefront of many Indian companies.
Indeed, India has been one of the best performing major stock markets globally in the last 30 years, compounding returns at 9.9% in US dollars since 1987(2). This performance has been generated during intermittent periods of weak coalition government, poor management of the economy and a lame currency. Investors should take heart that, over the long term, Indian stock market returns have been top of the class globally, not because of the government, but in spite of it. However focusing on near term challenges during such intermittent periods can lead to knee-jerk decision making.
For an active investor whose primary objective is generating alpha, India’s ownership of a large pool of well-run, strong businesses is supplemented by an equity market that has historically seen elevated volatility offering opportunities to buy shares in such businesses whilst they are mispriced.
Being capacity constrained, based on the ground, and research driven helps us as investors capture the long term opportunities offered by the country whilst enabling us to navigate the near term challenges posed by its complexity and volatility.
(1) Source: Bloomberg
(2) Source: Ibid