Duncan Robertson

Market Outlook

Asia Outlook


Latest Asian economic and market outlook. 


We continue to be generally positive on equity markets, based on the ‘goldilocks’ scenario of inflation normalising, rates having peaked, and economic growth proving reasonably resilient. We do not buy into the argument that inflation will be sticky. From a wage perspective, AI should be a fundamentally deflationary technology as it enables the replacement of labour with capital. Meanwhile, most signs point to the energy crisis being over, with natural gas prices continuing to be very weak, and the cost of clean energies such as solar power falling precipitously. There are even anecdotes of solar panels being using as fencing in Europe because the technology is so inexpensive. At the same time, the EV price war is heating up, which should be deflationary for autos in general. The one caveat to our benign view is that valuations are clearly less compelling after strong equity market performance. However, in the current goldilocks scenario of resilient growth and falling inflation we do not see this as a standalone catalyst for a significant correction in markets without an unforeseen exogenous event.

We will devote the remainder of this commentary to discussing India, where we have recently increased exposure following a correction in some of our holdings in the Financials sector and the smid-cap space more generally. There have been mounting concerns about Indian private-sector banks as loan-to-deposit ratios have increased, meaning tighter liquidity, and potentially slower growth for these banks. We do not disagree with this analysis, but would argue that these businesses are not priced to carry on growing at their recent rates in perpetuity. Thus, a marginal slowdown is not a huge concern for us. To quantify this, let’s assume that private-sector banks can only expand their loans in line with their deposit growth. Historically, this has been roughly equal to nominal GDP for the system, meaning at least 10-12%. But private-sector banks have been gaining market share in deposits, meaning they could grow at 1.2-1.5x the system. This would mean mid-teens growth in deposits and loans for the average private-sector bank, and potentially far more for the small finance banks that we own such as Ujjivan and Equitas. By focusing on areas with higher yields such as microfinance or small business loans, they can offer higher deposit rates but still generate a good spread. 

We also added more generally to our Indian smid-cap exposure over the quarter. There have been concerns about valuations in the space following extremely strong performance last year. Indeed, research from Bernstein found that the proportion of Indian smid-cap stocks trading below 20x earnings has shrunk from around 70% in FY07-FY13 to just 25% today. However, this must be caveated by noting that earnings revisions in India have been much better post-COVID, particularly in smid-cap. We would also note that smid-caps have been generally growing faster than large-caps in India. Much more importantly, when we look at our own holdings, we find valuations are very reasonable.

This is exemplified by our three largest active weights in the Indian smid-cap space: Samhi Hotels, Ujjivan Financial Services and Nuvama Wealth Management, all of which were increased in the recent correction. Hotel stocks tend to be valued on EV/EBITDA rather than P/E, and with good reason. A new hotel will have higher depreciation than an old one. All else being equal, it will have lower net profit, but as a new hotel that net profit will require less capex to sustain than would be the case for an old hotel. Samhi currently trades on just 13.5x FY25 EV/EBITDA. By contrast, large-cap peer India Hotels trades on 33.7x EV/EBITDA. Samhi’s valuation even appears to be good value in a global context, given that Indian consumer stocks tend to trade at a premium to Developed Market stocks due to their higher growth potential. Ujjivan Financial Services is the holding company of Ujjivan Small Finance Bank. The two entities will be merging this month, with the merger ratios already agreed. Ujjivan Financial Services trades at a 10% discount to Ujjivan Small Finance Bank, offering compelling near-term upside in our view. But much more importantly, Ujjivan Small Finance Bank, which we will ultimately own after the merger, trades on less than 8x FY25 earnings and just 1.6x book value. This looks extremely cheap for a bank that should be able to sustainably grow assets at more than 20% per year and deliver an ROE in the mid-20s. Finally, Nuvama Wealth Management trades on 25x FY25 earnings, a significant discount to its closest peer 360 One on 30x, and much cheaper than many of the larger-cap asset management companies in India such as HDFC AMC, which we believe have inferior business models. We regard Nuvama as the best value expression of our positive view on growing wealth in India.

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Nothing in this document constitutes or should be treated as investment advice or an offer to buy or sell any security or other investment. TT is authorised and regulated in the United Kingdom by the Financial Conduct Authority (FCA).

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