Emerging Markets Equities

Country visit: India

The LGM team visited India - an exciting time to visit the country after recent elections. We believe the quality of local businesses is very high.
August 2019

During the quarter, the team visited India — an exciting time to visit the country after recent elections. As our readers will know, we have large exposure to Indian equities in the strategy. We believe the quality of local businesses is very high. Many of these businesses, often run by families, have managed to build very strong competitive advantages through their operations in what has been a dysfunctional democracy with a lot of bureaucracy around it.

Upon landing in Mumbai airport, much urban change is evident in a city whose population has more than doubled since 1991. Seven metro lines are under construction, various highways above street level have decreased traffic substantially, and we observed many more high rises being built.

 

World’s largest democracy

One cannot visit India without taking a view on Prime Minister Narendra Modi. Is he the great leader that will change India for good or just another populist on the rise? We think he is a bit of everything.

Modi, a mastermind in political rhetoric, has managed to get a very strong mandate after the recent elections. Since Modi took office in 2014, we have seen elevated valuations, implying high expectations for growth from the Indian equity markets. The reality has been slower growth, whether we look at GDP figures or consumer numbers from the frontlines. It is no surprise that markets tend to overestimate change, and expectations of Modi are a good example of this. While he has been successful in reforming some parts of economy (Good & Services Tax (GST), insolvency code, central registration, medical insurance), he has failed in making radical decisions that would transform India (reforming state banks and labor laws, improving air quality, agriculture, federal structure). If during his second term, Modi can bring about socioeconomic change in a fiscally disciplined manner while creating long-term sustainable competitiveness through education and investment in production of goods and services, India is likely to do well. We remain hopeful that India will be better off at the end of Modi’s second term based on what we have seen from his first term.

 

The climate factor

The common thread of our discussions with those we met during our trip was the amount of tremendous opportunities companies have to grow their businesses by tapping into a vast domestic market where consumers’ income and purchasing power are expected to continue to grow. But, given the numerous and costly climate-related events India has had to deal with in the past year alone, we cannot help but wonder how such events, which are only set to become more frequent as the climate continues to change, can impact living standards and thus the potential for growth.

During our visit, local newspapers reported on how the fourth largest city, Chennai (estimated population of 10 million), was grappling with acute water shortages as the reservoirs upon which it depends had dried up. Furthermore, a report produced by three ministries suggested that 21 major cities, including mega cities like Delhi and Bangalore, are expected to run out of groundwater as soon as 2020, putting food and water security at risk for over 100m people. One of our holdings, Colgate Palmolive India, has been putting a lot of effort in water conservation across its manufacturing operations as well as its customer base through targeted education campaigns.

With regard to efforts to curb growing carbon emissions, we were positively surprised to learn that solar and wind makes up close to 20% of the installed power capacity mix. Solar tariffs have come down by around 90% since 2010, and today India ranks 4th and 5th globally in installed capacities for wind and solar power respectively. Many of the companies we spoke with have started buying solar or wind energy for their operations to bring down their emissions profile as well as to drive down overall electricity costs.

Climate change is one of the biggest challenges that is going to impact the livelihoods of hundreds of millions of people over the coming years and will be an important area for engagement with our investee companies.

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The LGM Responsible Global Emerging Markets Composite includes all discretionary portfolios managed according to LGM’s Responsible Global Emerging Markets ESG (Environment, Social and Governance) Strategy. Portfolios within the composite are managed and measured against the MSCI Emerging Markets but are restricted to investing in companies that demonstrate a clear link to sustainable investment. The benchmark is MSCI Emerging Markets (Total Return) Index. MSCI Emerging Markets Index is a market capitalization weighted index comprised of over 800 companies representative of the market structure of the emerging countries in Europe, Latin America, Africa, Middle East and Asia. Investments cannot be made in an index.

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