The current slump in the Indian stock market represents the biggest buying opportunity since 2013, according to Ocean Dial Asset Management’s David Cornell, who says this is important as you can only afford to be a long-term investor in the country if you pick your entry price correctly.
While most industry commentators caution against market timing, Cornell, who runs the India Capital Growth investment trust, highlighted four substantial corrections in India’s mid-cap equity market over the past decade, which to date have been followed by three recoveries that have exceeded the initial drawdown.
Yet Cornell said that had you invested towards the peak of the market each time, you would have had to wait about two years before you started making money – and this is the approach taken by most investors in India.
Pointing to a chart of flows into the group’s open-ended Gateway to India fund, he said that when the market is flat or falling, inflows dry up, but when it has been rising for a while, money starts to pour in – with investor interest often peaking at the same time as the rally.
“The reason for telling you that is because whether it’s Narendra Modi’s long-term positive narrative or the short-term negative narrative, neither of these things help the investor understand when he or she should be investing in the market in terms of timing, or more importantly, what’s actually going on the ground,” said Cornell.
“The enormous volatility that we’ve been witnessing in India over the last two years is largely because of the huge amount of change that is happening. And as we all know, change is never straightforward and it’s never simple: it’s always disruptive.”
While the narrative has recently turned negative on India, focusing on Modi’s failure to deliver wage or employment growth, Cornell claimed that anyone who avoids the country over the next couple of years is likely to underperform on a relative basis. He said there are two reasons for this: the first is because of the current low starting point of the Indian equity market; and the second is the enormous potential for productivity gains being made available through the country’s tech revolution.
“For example, the penetration of 4G users in China is 78 per cent and in India it is 33 per cent, so there is a lot more growth coming in India,” he continued. “The interesting data is the average revenue per user: so the cost in China is $7.50 a month, five times more expensive than India where it is $1.70 a month, virtually free. And, therefore. the consumption of data per person in India is double what it is in China. India is on 11GB a month.
“I don’t know what they are using it for, or what they are watching. But this is real, and it’s growing very fast and it’s forcing change.”
Cornell said the rise of the internet is having a noticeable impact on administration in India – for example, while it can take two or three weeks to obtain a passport in the UK, in India it takes just three days. Similarly, while getting broadband installed or opening a bank account can take 10 days and three weeks respectively in the UK, in India, both of these processes tend to be completed overnight.
While improvements in bureaucracy may not seem like the most exciting subject, Cornell said it is vital to India’s progress as it removes what are known locally as “rent-seeking opportunities”, which is the polite way of saying “taking a bribe”.
“When I was in India between 2007 and 2013, I had to go down to the local authority once a year to deposit the rent cheque for our office,” the manager added.
“The landlord advised me to take a cheque for 1 million rupees in one pocket and some cash in another pocket. I said ‘that’s not something I’m interested in doing, but thanks for the suggestion’.
“He said, ‘take a good book then, because you’re going to be there a long time’.
“When I turned up at the local authority office, it was like any film you see of India, millions of people, but just four people sitting behind the booths taking the rent.
“When I went back to work, the landlord told me the way it works is that the person behind the desk has paid the politician 10 million rupees in order to get his slot. He then has to collect bribes from people for 10 years in order to pay that 10 million rupees back to the politician. And once he’s earned and paid 10 million rupees back, he can then start collecting his bribes directly from you.
“If you open another booth, then the speed with which he’s able to pay back the politician’s money is going to go down by 20 per cent. So, of course, he has no interest in it, he would rather reduce it to three.
“Now that’s all done online.”
Aside from directly improving the administration processes that we take for granted in the developed world, Cornell said technology is also helping private companies bridge the gap where the state is found lacking. For example, he pointed out India has an “unstructured address system”, meaning a postcode covers an 87-kilometre radius, making delivery almost impossible in the slums.
However, one holding, Delhivery, aims to tackle this problem. The logistic courier service was set up in 2013 by three Harvard graduates who returned to India with an algorithm that can deliver a parcel within 10 square metres.
“Delhivery is delivering a million packages a day, 365 days a year, and it costs about $1.25 to deliver a package,” Cornell explained.
“To give you a sense of the size of the opportunity, their website tells us they have 25 per cent market share of the formal market, which is worth $1bn, and the formal market is about 1 per cent of the total market.
“Eddie Stobart has revenues of a $1bn and margins of 6 per cent. Delhivery has revenues of $250m and margins of 18 per cent. And they think that $250m is going to get to $3.8bn by 2024.
“I have no idea whether that’s accurate or not, but that’s the size of the growth opportunity.”
The manager added: “People have to understand there are very powerful forces at work and it’s a combination of the young people, technology and excessively high competition that are creating this dynamic market and a government that is trying to drive change
“And those powerful forces are leading to this kind of productivity revolution that is irreversible, whether Modi slips in the bath or whether a mid-size bank in Mumbai goes bust because it has over-extended itself.”
Data from FE Analytics shows India Capital Growth has made 31.87 per cent over the past five years compared with gains of 51.77 per cent from the S&P BSE Mid Cap index and 43.53 per cent from the MSCI India index.
Performance of trust vs indices over 5yrs
Source: FE Analytics
The trust is on a discount of 14.92 per cent to net asset value (NAV) compared with 13.71 and 14.51 per cent from its one- and three-year averages.
It has an annual management charge of 1.25 per cent.
Returning to Cornell’s point about the current buying opportunity, the manager was asked if this meant he would be telling investors not to buy the trust next time the market peaked.
“We are not frightened,” he replied. “This is the first time we’ve seen a genuine buying opportunity since 2013. And I think our narrative has always been cautious about valuations in the market.
“I won’t shy away from saying if the market is expensive. And you can hold me to that.”