I recently spent a week in Delhi and Mumbai meeting with corporate management teams and local investors to gain insights into the Indian economy and the outlook for upcoming elections. Meetings like these enhance our team’s understanding of how company management teams are thinking about their businesses and the potential impact they believe future macro events (e.g., elections) may have on how they deploy capital and pursue growth initiatives.
When I meet with company management teams, my primary focus is deepening my knowledge about key business drivers, industry dynamics and near-term growth prospects. However, I always set aside time to discuss the macro environment and what issues are top of mind for management. Often, the conversations take interesting and unexpected turns. During my most recent trip, CEOs shared ranging views, including concerns about the lack of progress on a nearby massive construction project, the perspectives of Japanese investors versus their U.S. counterparts and the policies being implemented under Central Bank Governor Rajan.
In isolation, these exchanges could be viewed as side conversations. However, over the course of a week, my conversations with business leaders in a diverse set of industries helped me gain a fuller picture of what the near-term outlook could be for India and the companies in the region.
One consistent message I heard across industries, regions and political parties was that change was needed and Narendra Modi, the favored candidate for prime minister, was best equipped to bring change to India. Many believe Modi can provide the political and regulatory stability to allow the pent-up demand for infrastructure investments to be unleashed. Many people commented on how the current leadership has rewritten contracts and introduced retroactive policy that makes the business environment difficult to navigate. This approach has hindered economic freedom in the Indian economy, and by extension, the flow of capital into infrastructure projects—hence, cranes that sit dormant for months on end. This concern about the near-term prospects for infrastructure build-out influenced the aforementioned CEO’s admiration for Japanese investors, who are more likely to accept potentially lower returns on invested capital (ROIC) on investments in the region.
Another consistent message of management teams was the concern about the equity valuations of their companies. Specifically, they were worried that investors would become impatient, given that increased economic activity is likely at least several quarters away. This was not just a timing/valuation issue, but they were also concerned that investors’ views have become overly optimistic.
The prevailing view is not that a Modi-Rajan partnership will spark significant economic activity, or that Rajan will have any impact on the economy at all, but instead the view is that a Modi-led government will get out of the way, which will lead to a reacceleration in growth.
In summary, the results of my recent travels were mixed. On the positive side, I had the opportunity to better know several management teams and based on this, I have additional conviction in several of our holdings. Also, we have identified a queue of opportunities that merit additional fundamental research by our investment team. On the negative side, the economic impact of a Modi victory is likely at least 12 to 18 months away and many of the equities we’ve held during this recent rally have appreciated to a degree that we are taking profits in our more cyclically-exposed positions. We have invested these proceeds into information technology and health care exposures that we believe have more reasonable valuations and may benefit, even if there is a lull in economic activity between the elections and enactment of reform initiatives. Longer term, we believe new leadership will be more pro-urbanization than the previous party and we are looking for opportunities that will benefit from this trend.