In 2001 Goldman Sachs’ Jim O’Neill coined the acronym BRIC for the four emerging economies of Brazil, Russia, India and China. He argued that the BRIC countries were poised for a takeoff, uncoupled from the performance of the developed countries.
The uncoupling is over — as the developed economies have faltered lately, so have the BRICs.
Now, with weak demand from the developed economies, slow domestic growth and spiraling inflation, many are writing off the BRICs. The contrarian BRIC is India. Its inflation has leveled off. Domestic demand continues to grow. And its dependence on foreign demand has lessened. That’s great news for investors in India.
An example: For investors in Alchemy Long Term, a small equity fund being managed out of Mumbai, 2012 has been exceptionally good.
Alchemy’s Offshore Equity Fund, to date, is up about 34 percent, compared to the 22 percent growth recorded by the benchmark BSE500 index. And it has beaten the Dow Jones Industrial Average, which is up to 13245 from 12218 on December 31, 2011.
“Alchemy is betting on management teams that continue to grow their companies. They see this tough environment as an opportunity to build, not just stay put,” says Hiren Ved. “They see this environment more as an opportunity, than a constraint,” says Hiren Ved, chief investment officer of Alchemy Investment Management, which manages Alchemy Long Term and a number of other India-specific funds. And they all are focusing on tapping domestic demand.
Alchemy is an investor in Bajaj Finance, a company that continues to grow revenues providing loans for the purchase of consumer and home appliances and two-wheelers such as scooters (cars and vans are too expensive). Another company in its portfolio is Titan Industries, an operator of stores that sell watches and jewelry. “They continue to roll out new stores aggressively and are well positioned to increase market share when the economy really rebounds,” says Ved.
Infrastructure companies that contribute to sustainable long-term growth — power generation companies, construction equipment, infrastructure financing — are also on Alchemy’s list of preferred investments. For sustainable growth and for consumer spending to continue growing, India needs to move forward aggressively with developing the country’s infrastructure. But India also needs to be cautious, says Ved, making sure that infrastructure development is in keeping with the needs and capabilities of its complex — and politically fragile — regional government structure.
What makes India stand out, according to Ved, is that it has already undergone a meaningful correction since November 2010. India’s investment climate is more transparent and disclosure-oriented than ever. And investors are rewarding companies that are true business-builders, instead of those that continue to live by financial engineering.
The country also has gone through a significant change in the reporting of finance and economics, India watchers say. Not only are regulators cracking down on insider trading and the failure to disclose financials, the financial press has been more aggressive in reporting financial news and misdeeds.
“We have moved from Kalyug (the age of downfall) to Satyug (the age of truth),” says Ved.
Transparency and increased disclosure have been major factors in the economic transformation that India is experiencing, says Karthik Balakrishnan managing director of Globescape Capital, a Washington DC investment advisory firm. Not only have Indian regulators such as SEBI become more aggressive in the information it requires of the various players, the existing laws are being enforced more rigorously.
This month regulators barred technology entrepreneur Arun Jain from the stock market for two years, charging him with trading on insider information. Jain, the founder of Polaris Financial Technology, had traded in his company’s stock on the basis of failed transaction before its public disclosure.
In September the nation’s highest court ordered Subrata Roy, one of India’s most high-profile businessmen and the founder of Sahara Group, a 123-company conglomerate, to return Rs 17,400 crores (about $3.8 billion) to depositors, together with 15 percent interest, because the funds had been raised without proper disclosure and regulatory approval.
Confidence in the markets has brought in a steady stream of global private equity investors such as Accel Partners and the Carlyle Group. The presence of foreign private equity has contributed to greater accountability and improved corporate governance, says David Wilton, chief investment officer of the International Finance Corp., the World Bank’s emerging-markets arm.
What also makes India so attractive now is that India has the most diversified economy of all BRIC nations, says Pablo Goldberg, head of emerging-markets research at HSBC in New York. Unlike the other BRIC countries, which are overweighted in such areas as energy, mining and manufacturing, India’s economic diversity is its strength and gives it greater flexibility in recovery.
India has the third-deepest equity market in the world in terms of number of listed companies and overall liquidity and a majority of company management teams have an acute focus on profitability and shareholder returns as opposed to favoring scale and revenue growth ahead of all else, says Colin Bell, director of Global Emerging Market Equities at Auerbach, Grayson & Co, a New York–based broker-dealer in global equities.
To generate returns that are more geared to domestic growth in the BRIC nations and less dependent on external demand, investors should “embrace liquidity risk and spend time evaluating business models with high barriers to entry, high returns on capital and low capital intensiveness (a rare combination indeed),” adds Bell. “I would go so far to say that India does arguably have the deepest market and best conditions for this kind of selective stock picking among the BRIC nations.”
