iGen Capital - CITE Investments

iGen Capital Investment Update Spring 2017

iGen Capital Limited is an Appointed Representative of Sapia Partners LLP, which is authorised and regulated by the Financial Conduct Authority. This research is for information purposes only and does not constitute investment advice.

iGen Capital Global: Emerging & Frontier Markets Focus: India

A CITE Investments company

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Emerging Market Valuations: Cheap vs Developed Equities

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Fiscal Policy: mixed approach but all working towards growth/ capital investment

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Trade Policy: export success remains key

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EM Risk: Continuous to be overrated by Developed Market allocators

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EM/ FM local matters: Understanding what drives local/ regional growth

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08/06/2017

Global: Emerging & Frontier Markets Thematic: Global Emerging & Frontier Markets: Taking a fresh look at India It can pay to invest in Emerging & Frontier Markets

We have investigated the recent performance of Emerging Markets and also assessed how India has faired since we initially commented on our outlook for India back in late 2015.

Domestic (Indian) Policies have driven performance contrary to what many believed

Continuing stock market performance It may surprise Developed Market investors, but India has seen significant investor interest and investment flows have been strong. We believe that a pull-back is necessary to give the markets breathing room to absorb the recent rally and find a new equilibrium. The market feels somewhat over-bought at recent levels. Equity Market Valuation

It is no surprise that India has done well. Most frequently, the demographic trend is used to describe the opportunity in India. We are more differentiated than that and suggest that a continuous, strong investment plan is enabling the economy to remain resilient and grow.

As per above, we feel that some stocks have had a significant run and we doubt that this can continue without being challenged at some stage. For that reason, we are cautious on general ETF products at this stage as these are ‘trend-following’ by design and miss an active overlay. We would certainly recommend to be more selective at this stage.

Fiscal Prudence in times of uncertainty

Outlook

The decision to devalue the currency late 2016 hit the markets with a surprise and no doubt, caused stir both within the political elite and consumers in India. However, and on balance, the move was a savvy one to recalibrate the ‘way business is done around India’.

We continue to favour India over China – and we say this with a 5-7 year horizon in mind. We have allocated to China and India over the years as Principal and Fund Manager investors: we suggest that India has simply more juice left in the tank and has not build its recent economic development entirely on credit which should make it more resilient vs China in the event of a global sell-off.

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Our Framework We believe that institutional investors should have exposure to Emerging and possibly Frontier Markets at all times. Whilst one may wish to reduce exposure from time to time, Frontier Markets in particular can behave a little bit like venture capital returns: nothing may happen for a while and then these markets just run away of itself. Missing these trends can be costly to institutional investors, in particular those investors who use various MSCI benchmarks to measure their own performance vs global markets. With this in mind, we assess each market in general and specific opportunities in particular with a specific view on (i) how does an allocation fit within global portfolios and (ii) what portfolio benefit could a specific investment add to an already diversified book. We are proud to focus on the next cycle and we are generally contrarian in our views and favour value over growth investment styles. But we are also pragmatic if trends do emerge.

iGen Capital Limited does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

08/06/2017

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Emerging Market Valuations: Cheap vs Developed Market Equities Strong, long-term total return potential

Whilst we see Developed Markets (DM) rallying from high to high, there is arguably little need to deploy capital in EM/FM. No doubt, the allocation recommendations appear to favour DM over EM on a continuous basis. We suggest that an allocation to EM/FM is a must in institutional portfolios (see Morgan Stanley's India's Passage to the Future)

Exhibit 1: Emerging Market Equity Valuations by country (source: JP Morgan Asset Management)

iGen Capital | Thematic Research | India | 2017

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08/06/2017

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Fiscal Policy: mixed approach but all working towards growth/ capital investment We cautiously agree that investment spending remains strong but would caution over short term-term 'over-spending' (China in particular)

Our view is that whilst Mr Trump focuses on "Making America great again", Emerging Markets are making steady economic progress, lifting their underclass towards middle class and with it consumer spending is steadily increasing (although at a low absolute amount in some markets) we feel comfortable that fiscal policies, including but not limited to India GST tax reform, are enabling a steady growth trajectory (see PwC's India Budget 2017 - On the growth path). It is worth noting that the OECD (February 2017) suggests that India must work hard to increase its tax revenue base – income tax revenues are simply too low (Brazil generates 2x) and tax (dividend in particular) too high (46%) vs international standards. Exhibit 2: Select Emerging Market Growth Rates (GDP) (source: OECD)

Exhibit 4: Inflation is under control (source: OECD)

Exhibit 3: Investment spending lagging (source: OECD)

Exhibit 5: Public Debt still high (source: OECD)


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08/06/2017

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Trade Policy: export success remains key Whilst we agree, we suggest that domestic investment spending and investment in education will provide a better gauge for long-term success In the near- and medium term, export success is critical to ensure that GDP growth supports the investment program that most EM countries are subscribing to. No doubt, regional differences are too broad to summarize here but the general drift is critical: nations that can match their investment in industry with equivalent investment in domestic affairs and education will most likely remain on a long-term growth trajectory, short-term hiccups not excluded. (See Goldman Sachs' India Consumer Close-Up & Carnegie's India's Trade Policy Dilemma and the role of domestic development). Exhibit 6: FDI key for future progress (source: OECD)


Exhibit 7: Tax Revenue mixed bag but GST positive (source: OECD)

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08/06/2017

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EM Risk: Continuous to be overrated by Developed Market allocators We continue to experience naive allocation suggestions based on little regional insights

EM/FM markets are so broad that brushing them under one comb is not advisable and does not do these markets justice. In fact, we recommend to assess these markets with a slightly different lens: Whilst we suggest that the macro factors have to be in play and in tact, a value-chain assessment coupled with industry competence is probably more insightful. Which countries have achieved scale and operational clusters to be part of the global supply chain - which of these have worked towards a competitive advantage? (see McKinsey's India's ascent: Five opportunities for growth and transformation). Exhibit 8: India growth potential (source: McKinsey)


Exhibit 9: Competing with higher income countries (source: McKinsey)

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08/06/2017

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EM/ FM local matters: Understanding what drives local/ regional growth A good driver for success is to understand local urgencies - what do local commentators urge their politicians to focus on? Which sectors/ industries would benefit? Lastly, we suggest that whilst the global supply chain matters, it is domestic/ local urgencies that drives politicians to make decisions that may decide on the future and fortune of many. Listening to local commentators remains key in deciding whether the current political elite understands what drives 'their people'. (see BNY's Global Emerging Market seeks to overweight India & for an industry example KPMG’s Media for the masses: the promise unfolds). Exhibit 10: Investment is slowing… (source: OECD)

Exhibit 12: India’s (wireless) internet user base growing (source: KPMG)

Exhibit 11: Agriculture a large sector, low productivity (source: OECD)


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