By the Vontobel Quality Growth Investment Team
Our portfolio exposure to India is very specific to individual companies. Looking at IT services companies, as an example, these businesses are domiciled in India but they are not necessarily just Indian companies. These are global companies and earn much of their income in dollars or euros. The expenses are primarily in rupee, so a rupee depreciation actually helps them. Additionally, these IT services companies operate mission-critical systems for global companies. With so many knowledge workers currently dependent on their company’s IT systems, we believe there is almost zero downside risk for service revenue. Coming out of this crisis, it is reasonable to expect many companies will find their IT systems were not as robust as expected and may require further investment. Nonetheless, there will be an impact on short-term growth as discretionary projects experience delays.
For the banks, a direct impact cannot be avoided. However, we expect banks with non-performing loans (NPLs) will grow the least of all banks in India. Any weakness in the other banks should benefit the remainder longer term and we own HDFC Bank Ltd., which we view as the strongest bank in India.
On the macro side, despite the government’s pronouncement of a 21-day lockdown, it will be extremely difficult to implement. Most people in India are not office workers who can work remotely. They are more likely farmers, street vendors, cleaners, cooks, drivers, construction workers, and so on. There are still a large majority who live hand-to-mouth with very little savings. The enforcement of any social distancing requirement would be nearly impossible to enforce.
It is also important to note that India operates more like a collection of states. So the outcome will vary from state to state. India has had less success mobilizing domestic savings for investment. Hence, they do depend to a greater degree on foreign investment. So the withdrawal of capital will be a negative force. On the other hand, India is a net importer of oil and a main consumer of foreign currency. So India benefits from lower oil prices.
India is a country where a million people a year still die of basic dysentery and a quarter of the population is illiterate. Managing the virus through social policies is not likely to work. To India’s benefit, however, is that the population is very young, so the human cost should be relatively lower versus other countries which are experiencing higher mortality rates. Relative to other Asian countries, India is more of a domestic demand-driven economy and less dependent on trade flows or tourism. From this standpoint, India has less downside risk from weak demand in developed economies.
We continue to evaluate the possible impact of the pandemic, positive or negative, on the future cash flows of the Indian businesses we own. We believe longer term, the companies we own may actually benefit. Over time, our exposure to India has decreased due to high valuations in some areas. We are hopeful that the current market dislocation gives us the opportunity to buy some of these companies back at more reasonable prices. We believe our performance results from owning businesses which have more stable, consistent earnings through competitive advantages, high return on capital, and greater growth opportunities. We cannot control share price movements but we are comfortable that the impact to earnings for the companies we own will be limited.
The commentary is the opinion of the subadviser. This material has been prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed. Opinions represented are subject to change and should not be considered investment advice or an offer of securities.