Aberdeen’s Hugh Young Is Bullish On India But...
The current valuations of Indian companies are too steep but that hasn’t stopped Aberdeen Standard Investments from betting on the world’s fastest growing large economy.
“We would love India to be cheaper. We are reluctant to pay very high prices,” said Hugh Young, Asia Pacific head at the Edinburgh-based investment company, which has about $643.3 billion in assets under management. “We wish we were able to buy good companies at 10 times the earnings rather than pay 20-30 times.”
Indian companies are valued at 18-19 times driven by prospect of earnings growth, said Young. “If that earnings growth comes through, as it should for many of them, it will with hindsight in five years’ time look a very attractive buying opportunity,” he told BloombergQuint in an interview.
The market veteran said there’s a lot of scope for financials to prosper in India.
Aberdeen Standard Investments invests in HDFC and Kotak group stocks through its India fund. Young said these stocks weren’t cheap to acquire and the ratings on them is quite high, but the global asset manager was prepared to pay up for the more quality end of financials. “We have tended to steer toward the private sector financials rather than the public sector financials.”
The past few years, he said, have been disappointing in terms of returns as earnings did not “come through” due to “glitches” like demonetisation and the implementation of the goods and services tax. But with the Sensex breaching the 39,000-mark, Young said India’s getting a lot more competitive today and there’s a scope for “tremendous growth” within the country. While some of the ratings today are a cause of concern, Young said there’s “more juice to come from it”. Indian companies, he said, will deliver the earnings growth that would justify the ratings at which the stock market is trading now.
Election May Cause Short-Term Disruption
As the country heads towards the third phase of the general election, Young said politics will cause disruption. “It (election outcome) will cause short-term jitters but unless there are major changes at the political level, I think business and life will improve for people.”
Watch the entire conservation with Hugh Young here:
Here are the edited excerpts from the interview:
Is this period of volatility a big deterrent for fund houses and for big investors within Asia as a pocket and does that see an out way compared to the growth opportunities which are persistent right now?
I don’t think it is a deterrent. We have been investing in Asia for decades and have been based in Asia for decades. We have substantial exposure to India for quarter of a century. Part and parcel of our job is volatility and uncertainty and day-to-day that does drive markets. Looking through that, it is trying to identify the quality and prospects for each underlying investment. That remains remarkably stable. We have seen variety of governments over the years. We have held certain holdings for 20 or more years within the portfolio. And you look back, and see that despite uncertainty 20 years ago, there were great opportunities. We are still are trying to look at India and other markets. Today we are trying to detach ourselves from the noise and distinguish between true drivers on what is going to make success and what’s not. Often, the noise doesn’t matter, and we forget about the noise minutes, days and weeks later. But so much has been driven over the years by companies themselves, the leadership, the workers at those companies, that it has overcome many adversities, and India has had its fair share of adversities ever since we have been investing.
Do you believe that India, at 18-19 times (of valuation currently) is stretched but in over five years, you will consider the earnings trajectory catching up to these valuations and therefore be ready to pay the premium now?
Yes, I think we would. It is a little disappointing over the last few years that earnings have not come as one would have hoped they would. There have been a few glitches like demonetisation and the goods and services tax. There have been hiccups along the way. Indian earnings do need to deliver to justify the ratings and the way we see stock market trading on today. But, we believe that it can deliver.
What is it that you seek value when you decide to invest in a particular company? Is it the stability at earnings growth within the company or a company which has the potential to give that kind of earnings growth, but in terms of pricing they are back-benchers and have not participated in the rally?
We look at the quality of underlying businesses. For quality, we look for a range of factors like strong financials to see companies through inevitable tough times which are least expected, but if you have a strong balance sheet, then that will see you through tough times and enable you to continue investing in your business. We look for strong, professional, experienced management and one which looks after its shareholders. So, for us governance is very important. At the simplest, we look for businesses which have the potential to grow. It doesn’t necessarily need to be cutting edge future. So, it can be anything from cement companies to the new economy. It has to be the promise of future growth drivers, but it has to meet our quality requirements.
Did the excitement in mid-cap and small-cap return?
I hope so. It is the beauty of stock market that it goes through a period of excess on the upside and disappointment on the downside. If you are a disciplined, thorough investor —which we try to be— then that gives you opportunities. We tend to get a lot more excited when people are rushing out the door, but we are more excited about getting in the door and vice versa when people would crowd into trade. Generally, we become a little vary. We are keen on opportunities. We would love if things were a lot cheaper than they are today. But that is a broad function of increase in liquidity that we have seen across markets and not just India.
Your India portfolio has a representation of 15 percent within the mid-cap space. Is that something that you are looking to enhance over a period of time?
It is not done on a top-down point of view, but it is done stock-by-stock. So, in each stock we put it in a sense that we don’t worry if it’s mid, small or large; it is only the right quality for us which is correctly priced compared to the potential we see from it. So, we might swing widely, in theory, from large to small. But in practice, if you see our holdings in many of our portfolios, we have held some for one or two decades and some even longer than two decades.
It is said that financials will lead from front and that’s where the market leadership is going to lie. Is that something which you believe too?
There is still a lot of scope for good financials to prosper in India. If we look at our portfolios, we have held HDFC. We have also held Kotak and I would love to say that they were very cheap. But they were not, and their ratings on them is high. As for financials, we are prepared to pay up more for the quality-end of the financials. We have tended to steer toward the private sector financials rather than the public sector financials. When we first bought HDFC 20 years ago, the valuations then looked a bit high. But the growth that has come through is astonishing and there is a scope for tremendous growth within India. It is getting a lot more competitive. We worry about some of today’s ratings but still think that there is more juice to come from it.
Will consumption and technology as themes be big enough for you to look at in terms of taking incremental exposure here?
The emphasis would be on incremental exposure. We are comfortable with tech names like Infosys and Tatas. These are the sectors that are exposed internationally. It comes with risks which we have seen over the last few years in many ways. We have seen de-rating of the sector and it no longer has the dramatic growth which it had 10 years ago. But there are solid growth prospects. As far as consumer is concerned, that is where we see more sustainable growth and is less affected by what is happening internationally. But the issue is the valuation of many of the consumer stocks that are at a premium to the IT services sector.
What are the opportunities and challenges that you see for India and Indian equity markets in the near term?
There are always challenges in India. It is not as linear as China which is due to politics and policies. We have been great supporters of reforms. Many people involved in business wish for more and quicker reforms. So, there should be speed of change. We are impatient people. Things tend to be a few steps forward and occasionally there is a step back but that is the nature of the beast. We keep on pressing for further reforms and openness as far as doing business is concerned. That will be a challenge. Big international challenges are interest rates and trade war. We can’t do much about it. But the opportunity is clear within India. The genie is being let out of the bottle, maybe as long ago as 20 years, and the entrepreneurial skills, the better lives will continue to drive India. There is sheer talent in India. Politics will cause disruption along the way. We hope it enables the intrinsic talent to share itself to its best.