Aberdeen Asset Management recently issued a report titled India: The Giant Awakens. BTVI spoke to Aberdeen’s Portfolio Manager Kenneth Akintewe. Excerpts:

Your report on India sees it standing on the verge of something big. What improvements you’ve seen made you think that the country is on the right track?

A lot of the improvements have been in place for a while. Raghuram Rajan joined the RBI in 2013, and that’s when we began to see improvements. At that time, India was suffering from chronic twin deficit issues. The current account deficit had gone up to 5.3 per cent of GDP, and there were a lot of fiscal pressures as well. The steps that were taken, such as the measures to curb gold imports, allowed the CAD to come down. This was done before we saw oil prices recede in 2014.

A lot of people give credit to lower oil prices for India’s lower current account deficit, whereas it was because a lot of proactive measures that were taken. Then we had the election. There’s been a lot of economic data, and it’s hard to go through all of it but the moves made to open up the economy, spur foreign direct investment, and the steps to control food prices and the distribution of food items, all those helped.

The back-to-back droughts went through without dramatic spikes in food prices. We also appreciate the measures taken for the capital markets which have made it easier to invest money into the economy. We are at a pretty good starting point now for something we are trying to map or look at from a 15-20 year point of view.

For an investor sitting in the US, your report on India will be read along with those on China, Thailand or Malaysia. If we start at 1947, we know where China and Thailand stand now from having nothing on the ground 70 years ago. Your report talks of how at the time of Emperor Jahangir, 25 per cent of world GDP was from India. There’s some point where the potential converts to reality, isn’t it? Investors need returns...

GDP is a very bad proxy for the opportunities in the market. We’ve been investing in India for a very long time. For a bond investor, the best opportunity was before the 2014 election, when you had a lot of risk being priced into the market, and therefore better valuations.

On your point about the countries that have progressed faster than India, you are right. China has seen very high levels of GDP growth for decades. But did investors get a lot of benefit by investing in the equity markets there? Not really. It was the worst-performing equity market that then went into a bubble, which then burst. So what we are looking for an economy with sound fundamentals and companies that are of the same profile.

The reason Aberdeen is able to allocate 13-14 per cent of its Asia-Pacific equity fund to India is because we can find new companies that have very good managements and strong corporate governance. Will we be able to do the same thing in China? No. So that is a very important starting point. India has gone through a very painful period before 2014. Since then the fundamentals have improved, the potential for inflation has structurally declined, and potential growth is improving, and is better than other regional EMs.

At this point, we’d say that we are surprised that the rating agencies have not changed their outlook to a more confident one, if not upgrade, India’s sovereign rating. We expect that to happen in the next 24 months.

What’s your view on the banking clean up the RBI has undertaken as well as the reform it has initiated in the bond market?

These are extremely important transitions. The banking sector has been pretty high on the risk factors. You may need to do further recapitalisation and cleaning-up. They’ve to keep at it. While a lot of emphasis has been put on Rajan, you must realise that it is a much broader team that is driving this structural reform. When the news first came that Rajan was stepping down, some reacted as if it was the end of the world, but India is not short of top-notch and capable people. The transition made at the RBI is a sign of that; I think they have chosen one of the best people possible in Urjit Patel. We are confident of seeing more reform in the banking sector.

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