Pension funds are keen for asset managers to increase allocations to India, some advocating for a 20% allocation in their emerging markets portfolio. India’s growth trajectory could potentially eclipse China’s, given its focus on the service sector rather than manufacturing. At its European Media Forum on Friday, Edinburgh-based Baillie Gifford also acknowledged burgeoning opportunities in Latin America and Indonesia, particularly due to the increasing connectivity and the unfolding global energy transition.
As investors look for alternatives to China, Baillie Gifford’s focus on India, Latin America, and Indonesia showcases a diversified approach to emerging markets. In India, the emphasis is on the services sector, the energy transition and improving connectivity on the back of a better physical and digital infrastructure.
In Latin America, opportunities lie in private banking, ecommerce and some commodities, while in Indonesia, the underbanked population presents significant potential for financial services. Collectively, these markets offer a variety of investment avenues that align with the global trends of digitalisation and energy transition.
Connectivity
Sally Greig, an investment manager at Baillie Gifford, recently returned from India. She highlighted new metro lines in Mumbai and a significant infrastructure rollout including new airports and roads. “That connectivity is really transforming India, making it come together as one country,” she said. India’s economy is now one of the most stable in the emerging markets, buoyed by government reforms and an inflation rate reduced to an average of 5 percent from 8 percent a decade ago.
“India is not on a path of becoming a manufacturing economy like China has,” Greig noted. Instead, the services sector has grown by 50 percent over the last decade. Modi’s “smart reforms” are “unpicking the frictions and creating a much better environment for business,” according to Greig.
Baillie Gifford mainly targets Indian debt as equity opportunities are still thin on the ground. “In our team we have a sustainable EM bond fund that invests in bonds issued by Greenko, and Renew, which are two huge renewable companies in India,” said Greig. “They’re really making the most of the kind of opportunities for solar, particularly solar in India, because it’s such a hot country, and wind, which I think is going to be really what drives that kind of renewables forward. They’ve got their net zero commitments for 2070. That’s quite a long way off, but I think there’s a lot to do. There’s going to be lots of opportunity there in the climate space.”
Many small businesses, for now
For the moment there are few equity opportunities as India’s economy still is highly fragmented. More equity opportunities are expected to emerge once digitalisation starts paying off by bringing businesses closer together. “One of the problems for India perhaps has been that it’s got a lot of really small businesses, and a few huge ones. There’s not as much in between. What digitization should do is help some of those smaller businesses grow more easily,” said Greig.
Holdings in private sector banks in India are also seen as attractive, given that 70% of India’s banking sector is controlled by poorly-managed state-owned banks. “That’s a great backdrop for the private banks that are actually really well run,” said Baillie Gifford partner Roddy Snell.. “It means that every year for the past 20 or 30 years, they’ve been able to take a one or two percent market share. We think that just continues for the next 10, 15 years. And they’re not particularly expensive. They’re very profitable, 15 to 20 percent (return on equity). You’re not paying particularly high in terms of price to book valuations.”
‘Broadly sensible’
The geopolitical landscape in Latin America is variable. Despite political instability, countries like Mexico and Brazil have made strides in implementing “broadly sensible” policies, as noted by Andrew Stobart, another investment manager at Baillie Gifford.
Mexico’s US-dependent manufacturing economy is benefiting from geopolitical changes, including a switch away from China. “From a stock market perspective, or from an investor’s perspective, there are very few ways of directly getting exposure to these trends. So we’ve chosen to do that indirectly,” said Stobart.
Baillie Gifford investments in Mexico focus on private banks like Banorte and retailers such as Wallmex. In Brazil, the firm’s portfolio includes oil firm Petrobras and First Quantum Minerals.
Online ecommerce platform Mercado Libre, founded by an Argentinian with a US MBA in 1999, is one particular investment Baillie Gifford has held in Latin America since 2009. The firm was modelled after China’s Alibaba and Baillie Gifford has expanded its position a number of times, also participating in its IPO. “It’s grown very, very rapidly by just executing extremely well,” said Stobart, adding that the firm also managed to effectively leverage outdated networks of postal offices for distribution and has since also added credit services.
Ecommerce growth
A similar holding in Baillie Gifford’s portfolio is Sea Limited, active in Indonesia. Digitalisation, better connectivity and prospects for better financial services, is enabling Sea to grow in Asia in a similar way as Mercado Libre does in Latin America. The firm now is a leading global consumer internet company in the region. Sea is a relatively new holding for Baillie Gifford, in its funds following the firm’s IPO in 2015.
Indonesia is seen as a market with potential for growth, especially in the financial sector. “About half of people still don’t have a bank account in the country,” said Roddy Snell, another Baillie Gifford manager. The firm has a holding in Bank Rakyat, which Snell regards as “the best banking franchise across all of Asia.”