While most investors wait expectantly for big bang reforms from new Indian Prime Minister Narendra Modi, Matthews Asia'a Sunil Asnani is taking a different route and backing stocks that aren’t heavily dependent on economic reforms.
‘I prefer companies where the management is in the driving seat and isn't just the passenger,' Asnani, who is lead manager of the Matthews Asia India Fund, told Citywire.
Examples of such companies that Asnani has invested in include a port operator, an export-oriented engineering company and even a power equipment manufacturer.
‘Typically, I stay away from infrastructure developers because they are too dependent on reforms, but this particular power equipment company’s management is quite astute since they have found other markets to sell their equipment,’ he added.
‘If economic reforms occur, many of these companies will benefit, but even if reforms don’t take place, these companies will be fine.’
Banking on banks
Another sector that Asani, who started managing the fund in June 2013, is overweight on is financials, primarily private-sector banks.
‘While public sector banks account for market share, it’s becoming increasingly hard for them to hold on to that share. They are struggling with capital requirements even as capital norms are becoming stricter, their lending culture and standards are not up to the market and there is a misalignment of incentives.'
He believes private sector banks will be the gainers. ‘However, we invest in banks that don’t chase growth. We don’t invest in banks that chase growth at the cost of profitability or lending standards,’ Asnani said.
Financials account for 27.4% of the fund's portfolio, while three finance stocks -- Shriram City Union Finance, Housing Development Finance Corp and Kotak Mahindra Bank -- rank in the top ten holdings.
Reforms are still needed
Asnani pointed out that in recent months, stocks of companies with secular growth have held up even as the overall market has been treading water, while stocks of companies that are highly dependant on reforms, such as infrastructure and metals, have corrected.
‘It was unrealistic for investors to expect big bang reforms in the first three to five months of the new government,’ he added.
In terms of reforms, the government needs to focus on measures at the input level, he said.
'Right now, the factors of production are not free, which makes it very complicated to conduct business in India.'
‘If you simplify those procedures and make those factors easily transferable, you can go the next level of growth through higher investments. Currently, growth is consumption-led, but for growth to reach the 9% plus level, we need investment-led growth.’
In the one year to September 2014, the Matthews Asia India fund has returned 61.85%, while the Citywire benchmark S&P BSE 100 has increased 41.97% in US dollar terms.