In a column in the Financial Times last year, fund manager Terry Smith made an interesting observation. He wrote about how infrequently he hears fund managers or investors talk about investing in a good company - good products or services, strong market share, good profitability, cash flow and product development. While they obsess over macroeconomics, interest rates, quantitative easing, asset allocation, regional geographic allocation, currencies, developed markets versus emerging markets — they almost never talk about investing in good companies.
Karen Kwok, editorial assistant for Morningstar.co.uk, shares Smith's views on China and India, and names his "good stocks".
On China...
Smith has expressed worries over Chinese government policy and its effect on retail businesses, leading to an underweight position in his Fundsmith Emerging Equities Trust, or FEET.
“We are still sceptical about the policy outcomes implemented by the Chinese government,” Smith said at a panel hosted by Frostrow Capital this week, adding that he thought many businesses in China were “not very well run”. However, Smith said that he has been looking to increase his allocation to China in his portfolio, especially in the travel sector. Outbound tourism spending in China continues to soar, thanks to cheaper travelling costs in a low inflation environment. “I will be shocked if I don’t see Chinese online travel businesses continuing to grow thanks to the international travel of Chinese consumers in the coming decade,” Smith said.
On India...
FEET currently has only 4% positioned in China, which means the major economy does not feature in the top five holdings of countries in the portfolio. Instead the fund’s largest exposure is to India at 31%, followed by the Philippines, South Africa, Nigeria and Indonesia.
India stock Marico, a consumer products manufacturer, is the largest weighting in the trust at 2.9%. According to Smith, his conviction is due to the millions of emerging middle class consumers created through the process of industrialisation and urbanisation in India. India also has the “largest repository of high quality companies in emerging markets”, Smith argues.
Xavier Hovasse, manager of the Carmignac Emergents Fund believes in ICICI Bank for long-term growth. In a conversation with the editor of Morningstar.co.uk, he said that it is more a turnaround story that the bank hasn't done very well.
"In India, the banking penetration is quite low, so the household debt and corporate debt as a share of GDP is very low. It's much lower than the average of emerging markets. You have a proper long-term growth story ahead for the entire banking sector and private banks are very well run.
"ICICI has a very good insurance business. And they have been in trouble because they have exposure to the steel sector which is completely distressed in India. We've done a lot of work and we've made our calculations and if we make the proper adjustments, this is a bank trading on 1.2x book value, so it's very, very cheap. There is a very strong valuation argument.
"India is our largest country. We like a lot this country. We invest a lot in India. But sometimes stocks are very expensive and this is a very good opportunity."
Smith is not the only one skeptical on China. Mark Asquith, Manager of the Somerset Capital Emerging Markets Small Cap Fund expressed similar views to Emma Wall, editor at Morningstar.co.uk.
According to him, "China is not particularly attractive from a bottom-up perspective. Valuations are better, but fundamentally the businesses remain unattractive. They are in a system which is largely rigged by state-owned players which makes it very hard to compete against them, especially in the small cap space and regulated pricing along with vested interest. So, it doesn't make for a particularly healthy industry landscape.
"From the top-down view, they have been running like a rat on the wheel since 2008 when there was a huge fixed asset investment and the concomitant debt overhand given that there weren't prices available to generate returns on that investment. So, they tried to equitise the heavily indebted companies at the beginning of last year, hence you saw the huge rally when then collapsed as people decided these weren't good credits. They then doubled credit growth at the end of last year.
"So, we're in quite a scary situation, but they may have one last weapon and that could be they double credit growth again or they may devalue the currency. Both of which will have profound influences for the world," he said.
