Insights from Rob Brewis, Investment Manager at Aubrey Capital Management, on India closing in on China as the largest country in a benchmark emerging-market index (as reported in the Financial Times this week).
Rob and his colleagues have been ‘pro-India’ for some time, and although they’re still finding quality growth opportunities in some Chinese holdings, they have moved more of their allocation to India over the last couple of years.
Rob Brewis, Investment Manager at Aubrey Capital Management, commented,
“We have always taken the view that investing by index is a bit like driving by the rearview mirror. It gives you a very good idea of what has happened in the past, but it is not much help in predicting the future. A decade ago, when Narendra Modi first came to power, India was indeed only 7% of the MSCI EM index. That it was likely to be a considerably higher weighting 10 years’ on was not a difficult leap to make at the time, given the progressive BJP government’s likely reforms, as well as the fundamental drivers of growth of a country at that stage of its development, as well as India’s sheer size. Our Strategy’s India weighting at the time was around 25%.
There are other factors driving the current index weighting. One is the country’s economic management which has been textbook for a decade, and this has been reflected in stronger government finances, gradually lower inflation and therefore a more stable currency. The other is the companies themselves, which are some of the best quality growth companies in the world, with high returns, strong cashflow and good growth. These are exactly the attributes we look for and Indian companies have these in abundance.
As for valuations, we have another saying here, that you get what you pay for. Given India’s prospects over the next decade or longer, as the fastest growing large economy in the world by far, we would expect to pay more than for, say, China which is clearly slowing down and rapidly so. The only surprise to us about Indian valuations is that they are only in line with their average for the past 7 or 8 years, when prospects are clearly much improved. Our weighting today is closer to 50%, and it will be interesting to see where the index will be over the next decade, but we doubt it will stop at 25% as some have surmised.”
