Important Note Click to maximise
Important Note I have read and agree, click to minimise

Please read the following important information for FSSA Indian Subcontinent Fund

    •     The Fund invests primarily in equity and equity related securities in Indian subcontinent which may expose to potential changes in tax, political, social and economic environment.

    •     The Fund invests in emerging markets which may have increased risks than developed markets including liquidity risk, currency risk/control, political and economic uncertainties, high degree of volatility, settlement risk and custody risk.

    •     Investing in small /mid-capitalisation securities may have lower liquidity and their prices are more volatile to adverse economic developments.

    •     The Fund’s investments may be concentrated in a single country/ sector, specific region or small numbers of countries/ companies which may have higher volatility or greater loss of capital than more diversified portfolios.

    •     The Fund may use FDIs for hedging and efficient portfolio management purposes, which may subject the Fund to additional liquidity, valuation, counterparty and over the counter transaction risks.

    •     It is possible that a part or entire value of your investment could be lost. You should not base your investment decision solely on this document. Please read the offering document including risk factors for details.

FSSA Indian Subcontinent Fund

Monthly Manager Views - May 2022

Fear of missing out

That would perhaps be an accurate description of what drove some of my portfolio decisions as a young fund manager, roughly 15 years ago during the global financial crisis (GFC) meltdown. Of course, the phrase hadn’t been invented yet back then; but the fundamental drivers of market cycles and human psychology have not changed. In the mid-2000s, when the Indian stock market was melting up (alongside global markets), it was the infrastructure and the real estate companies that were the darlings of the market. Despite the portfolio having done very well for our clients during that period, there was significant disappointment that we had ‘missed’ several real estate and infrastructure stocks that had turned into multi-baggers1. It was all about land banks and order books and it seemed certain that these business would become multi-billion-dollar enterprises over the next five to ten years! Then, when the markets began to wobble, these stocks fell quite substantially from their peaks. Sensing an opportunity to make amends in the portfolio, I rushed in and bought what turned out to be some of the biggest mistakes I’ve made in my career, watching them fall into an abyss when the GFC actually hit. Painful lessons like these keep us humble and make better investors out of those of us who manage to survive a few cycles.

Talking about cycles, without pretending to be a macro expert (regular readers will know that we are anything but!), it looks like we are probably at a similar stage in India with respect to some of the recent ‘new age’ initial public offerings (IPOs). We had written about this phenomenon last year – the gist is that a lot of businesses with questionable business models but fancy spreadsheet models listed themselves at ludicrous valuations; and we watched from the sidelines (save for our tiny investment in Nykaa, India’s leading online beauty retailer, which we have since exited as valuations became more outrageous post-listing). For a time, our conservative stance made us question our convictions, as companies we thought were very expensive to begin with went on to double on the day of listing as a matter of daily occurrence. But now, we are once again seeing a wobble among these present-day market darlings (though “wobble” might be putting it mildly!)

For example, companies such as PayTM (-72% vs. its peak), Policybazaar (-60% vs. peak), Cartrade (-64% vs. peak), Zomato (-60% vs. peak) and even Nykaa (still up 30% vs. its IPO price but down 44% from its peak) have all fallen substantially this year. We are sure that a few of India’s leading online businesses will emerge out of the rubble, but for now, we are yet to find any compelling investments. In a similar vein, we have been assessing several manufacturing businesses which have been recent beneficiaries of the systemic inefficiencies created by the pandemic or by geopolitical tensions. Growth rates for these businesses have accelerated in recent years alongside higher profitability and the market rewarded them with higher valuations too. With our risk-reward hats on, we stayed away, resisting the accompanying FOMO2; that is until recently, when we followed one of India’s most respected bankers who became chairperson of a seemingly well-run and fairly valued active pharmaceutical ingredient (API) manufacturer. The cycle then turned, as it always does, and the company’s shortfalls were exposed. Regardless of the fact that the business is being repaired and should limp back to health in the medium term, this was a small mistake that we could have avoided in hindsight.

Fresh from our trip to Mumbai and Delhi, it does seem that growth expectations are being reset, cost inflation is being built into margins and some sort of sobriety is returning to how these erstwhile high-flying companies are valued. We remain on guard, keen not to repeat old mistakes.

 

1 An investment that appreciates to multiple times its initial value

2 Fear of missing out

*Company data retrieved from company annual reports or other such investor reports. Financial metrics and valuations are from FactSet and Bloomberg. As at 31 May 2022 or otherwise noted.

Important Information

Investment involves risks, past performance is not a guide to future performance. Refer to the offering documents of the respective funds for details, including risk factors. The information contained within this document has been obtained from sources that First Sentier Investors (“FSI”) believes to be reliable and accurate at the time of issue but no representation or warranty, expressed or implied, is made as to the fairness, accuracy or completeness of the information. To the extent permitted by law, neither FSI, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from any use of this. It does not constitute investment advice and should not be used as the basis of any investment decision, nor should it be treated as a recommendation for any investment. The information in this document may not be edited and/or reproduced in whole or in part without the prior consent of FSI.

This document is issued by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission in Hong Kong. First Sentier Investors is a business name of First Sentier Investors (Hong Kong) Limited. First Sentier Investors and FSSA Investment Managers are business names of First Sentier Investors (Hong Kong) Limited.

First Sentier Investors (Hong Kong) Limited is part of the investment management business of First Sentier Investors, which is ultimately owned by Mitsubishi UFJ Financial Group, Inc. (“MUFG”), a global financial group. First Sentier Investors includes a number of entities in different jurisdictions.

To the extent permitted by law, MUFG and its subsidiaries are not responsible for any statement or information contained in this material. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment or entity referred to in this material or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.