Setting the picture right
It will be unfair to judge India based on headlines
Dear Jim (Rogers),
Our relationship is one way. I have heard you a few times in person and seen many times in print. You may not know me but I am a part of a team that has given 7 times more returns in dollar terms than Berkshire Hathaway has over the past 17 years. We have beaten the benchmark index by double the margin of Warren Buffett’s outperformance since our company’s inception.
I read an interview by you on India (http://mintne.ws/1EvwKIz). You made some profound statements. I am taking the liberty of putting them in the right context.
“Stock market performance is not equal to India’s performance.” I completely agree that India should focus on the economy rather than the market. India should focus on domestic investors and foreign direct investments (FDI) rather than hedge fund managers. It should not give undue attention to the market as it can run ahead of the economy on bullish sentiments and fall behind on bearish ones.
“I had bought shares in India—it was one of the few times I’ve done that in my life, and it was because of the new government.” India should, in fact, have been part of your core portfolio. While many banks in your part of the world trade at prices first seen in the early 1990s, the BSE banking index in India has risen 19.45% compounded annually in the past 10 years. You would have made far more money if you were an investor in India rather than a trader. I urge you to consider investing in equity mutual funds as most of us are outperforming the benchmark indices by large margins.
“First, get rid of exchange controls and make it easier for foreigners to invest in India.” Please show me one market where the largest bank, mutual fund, telecom company, or consumer staple company is majority owned by foreigners. Easy access to India is demonstrated by the fact that foreigners now own more than half of the free float, in just about two decades. India also permits investments through participatory notes (P-notes). Even when the stock market had hit a bottom in 2008 or when the rupee had depreciated sharply in mid-2013, foreign institutional investors (FIIs) had full freedom to take their money out. While we do have some taxation issues, there are no exchange controls for foreigners. You should actually be asking India to enforce exchange control rules, unless you are long on Swiss banks.
“I still own Indian shares, and I wonder if I should continue holding, because, after a year of no action, you begin to wonder if anything is going to happen.” It will be unfair to judge India based on headlines. Many economic and qualitative parameters have shown significant improvement over the past 12 months. Let me narrate a few instances to show that things have started moving.
A road contractor who had bid for a national highway project through an e-tender told me he got the letter of intent in three hours by e-mail. The government plans to spend four times more than last year on building roads. I met an iron ore miner who said that iron ore mining is likely to begin in Odisha in the near future, and may boost domestic production by more than 20%. Many coal mines will also become operational post-auctions. A railway contractor told me that railway orders have started flowing with transparency in tendering. I met a power equipment supplier who mentioned that public sector units have started giving orders.
“I bought Chinese shares last week, even though it was going through the roof. The risk at this point in China is that it looks like there is a bubble developing.” Chinese markets, having doubled in 12 months, are probably a bit overvalued. Their government is trying to cool down markets that were boosted by the cheap and easy leverage to domestic investors. India has outperformed China by more than two times in dollar terms over the past 15 years. It will only be fair to say that China and India both need to be part of your core investment portfolio.
“Rating agencies rarely get it right about anything.” Rating agencies have indeed been unfair to India. Despite the longest track record of non-default, we get much lower rating than deserved.
“I am not saying he is great—all central bankers are bad—but, he is certainly the least bad.” This statement is wrong. Central bankers in India do a good job. They manage conflicting objectives of stable rupee, improving growth, controlling inflation, maintaining banking stability and managing government’s borrowing programme. Many comment on our system without understanding the scale. When our Railways moves more than the population of Australia every day on its network, it has to be evaluated on separate benchmarks.
“I own gold. But I’ve constantly said I am not buying gold. I expect another opportunity to buy gold sometime in the next year or two.”
Gold prices are supported by Indian consumption. We have spent more money in importing gold, silver and diamonds than FDI and FII inflows in the past five years. The government has announced gold deposit and lending schemes along with stringent laws against black money. If executed well, these schemes can reduce Indians’ craze for gold. If India stops importing gold, you can guess where gold prices will go.
I have always found it better to invest in golden entrepreneurs. Since the inception of the Sensex in 1979, it has outperformed gold by more than 21 times in dollar terms.
India is changing with newer and better business models. There will be many winners and a few losers. Don’t go by the headlines. Do your own analysis. When I heard you for the first time at a mutual fund award function years ago, you mentioned that one should invest in orange juice and sugar. I bought Indian sugar stocks, which multiplied far more than physical sugar’s price. Most of the times, it makes sense to listen to all but to choose your own path.
The author is managing director, Kotak Mahindra Asset Management Co. Ltd.