Category: insights

After a six-week period, India finally received its much-awaited election results on 4 June. Incumbent Narendra Modi and his party, the BJP, won 240 seats, failing to maintain the absolute majority they have enjoyed since 2014. However, the BJP’s wider alliance, the NDA, secured 292 seats, surpassing the 272-seat majority mark. As a result, Modi will remain the prime minister of the world’s largest democracy, leading a coalition government in which the BJP relies on smaller parties within the NDA.

Source: Citi Research, ECI

Over the past decade, the BJP’s pro-business agenda has proven to be highly popular among investors, making this week’s result a shock and disappointment for many who are worried about pro-business policy continuity. The party has implemented a wide spectrum of reforms aimed at prioritising economic growth, maintaining low inflation, ensuring fiscal prudence, boosting exports, attracting FDI and improving foreign relations. Here we list some of the party’s most significant reforms:

Make in India, 2014.

Promoting Manufacturing and Infrastructure

This multi-faceted initiative aimed to make India a manufacturing hub, particularly in electronics, whilst upskilling its labour force and attracting domestic and foreign investment into 25 key sectors, such as automotive and textiles. It included simplifying regulations and reducing red tape to improve the ease of doing business. Additionally, it placed a crucial emphasis on improving infrastructure through increased investments, as well as opening previously restricted infrastructure sectors to FDI, such as railways and construction.

Throughout its tenure, the BJP has intensified its efforts to develop electronics manufacturing along with semiconductor manufacturing, introducing further schemes such as the Production Linked Incentive scheme (2020) and the Semiconductor Mission (2022). These initiatives have attracted international businesses such as Apple, which aims to manufacture 1/4 iPhones in India by 2025, along with Taiwanese Powerchip Semiconductor Manufacturing Corp, Japanese Renasas, and Thai Stars Microelectronics, all of which are supporting the construction of India’s first three semiconductor fabrication facilities this year.

These initiatives reflect the agenda of the BJP in government over the past decade in which they have significantly increased capital expenditure across various sectors, not limited to manufacturing alone. This government has helped to drive investment, stimulate job creation, bolster consumer demand, and place India as a robust and stable alternative for countries looking to diversify their supply chains.

Source: Reuters, Indian Budget documents/speeches

Goods and Services Tax, 2017.

Reforming Tax

Another key reform is the Goods and Services Tax (GST) which consolidated the numerous cumbersome indirect taxes at both Central and State levels into one simplified and unified national tax framework. This overhaul not only streamlined tax processes but also accelerated the transport of goods and enhanced logistics efficiency by eliminating state barriers and reducing compliance burdens, measures particularly important in a country as large as India.

Furthermore, the GST has increased tax collections by broadening the tax base, integrating more businesses into the formal sector, and increasing tax compliance and administration efficiency. Since its inception, GST collections have consistently followed an upward trajectory, increasing from an initial Rs 92,283 crore in July 2017 to its highest yet of Rs2.1 lakh crore in April 2024¹. This has ensured fiscal prudence alongside the government’s increased capital expenditure on reforms such as Make in India. The government’s fiscal prudence is evidenced by the FY2023-24 fiscal deficit of 5.6% betting the forecast of 5.8%, according to recent data released by the CGA. Moreover, it is projected to further reduce to 5.1% this financial year².

Source: PIB, WorldBank, Make in India

Technology Incubation and Development of Entrepreneurs (TIDE 2.0), 2019.

Encouraging Innovation

The Ministry of Electronics and Information Technology under the government launched TIDE 2.0, an upgrade of the original TIDE project launched in 2008. This initiative supports startups involved in emerging technologies like IoT, AI, and blockchain through technical and financial assistance. TIDE 2.0 reflects the government’s commitment to positioning India as a global hub for science and technology and fostering a favourable business ecosystem for innovative startups.

Source: World Intellectual Property Organisation

How will the election result impact the Indian market moving forward?

Modi will inevitably face greater challenges in passing certain business reforms this term. Unlike his previous two terms, he now must juggle the demands of allies with differing policy priorities to maintain a stable coalition, which may stymie the progress of certain business reforms. Vulnerable pipeline reforms include his land and capital reforms, the Uniform Civil Code, and the One Nation One Election initiative. On top of this, India may witness an increase in populist measures, such as unemployment reforms and higher rural spending.

However, a coalition government does not spell the end for pro-business reforms. Many of Modi’s core allies have a strong pro-business track record in their respective provinces. For example, Chandrababu Naidu of the TDP, who served as Chief Minister of Andhra Pradesh (1995-2004, 2014-2019), prioritised making the state an FDI and technology hub during his tenures. Progress is expected to continue in key areas such as manufacturing, regulatory improvements, labour law implementation, job creation, and workforce upskilling. Furthermore, the business reforms of the past decade will continue to drive India’s impressive economic growth, with an 8.2% GDP growth in FY2023-24, making it the fastest-growing major economy. The Reserve Bank of India recently raised the FY2024-25 real GDP growth forecast from 7.0% to 7.2%, highlighting the country’s ongoing growth prospects. Further still, the result does not undermine macro tailwinds such as India’s demographics, including a growing talent pool and consumer market, as well as its favourable position as the world looks to diversify supple chains.

Source: IMF, April 2024 Outlook

The Nifty 50 saw a sharp 6% drop on the day of the result³, the steepest decline in two years. Stocks in sectors such as PSUs and realty, which have benefited from the general market optimism and were trading at high valuations despite average fundamentals, were most affected by the volatility, which was largely a correction from the previous day’s rally and a short-term sell-off on unfulfilled expectations. By 7 June, the Nifty 50 had already recovered all of its election day losses and we expect the Nifty 50 and Sensex 50 to continue their strong performance so far this year, up 7% and 8% respectively⁴ (as of 7 June 2024). 

This week’s election result has not affected our bullish view on India. Our conviction in India’s long-term growth story has further strengthened over the past year, leading MCP to add three new high-conviction Indian ideas to the portfolio. A two-month trip by an MCP analyst to meet with companies and experts on the ground reinforced our bullish view. We believe India’s journey to become one of the world’s great economic powerhouses will not be undone by a single election result.

¹ Press Information Bureau

² Press Information Bureau

³ Capital IQ

⁴ Capital IQ 

The history of semiconductors dates back to the 19th century, marked by Karl Ferdinand Braun’s discovery of rectification in 1874. Practical applications then emerged in the early 20th century, such as the cat’s whisker detector, a rudimentary semiconductor device used in early radio receivers. This device consisted of a thin wire, or ‘whisker’, that made contact with a semiconductor crystal, such as silicon, to detect and convert electrical signals into audio signals.

Since its inception, the industry has been characterised by cyclicality as well as its relentless pursuit of innovation, defined by Moore’s Law, which states that the number of transistors on computer chips double every two years with little change in price. Of course, the industry has come a long way since those first primitive semiconductors and their applications, and continuous advances have given way to semiconductors so sophisticated that they have become indispensable to the functioning of modern society. The industry’s rapid evolution is reflected in its staggering growth, with annual sales quadrupling in just two decades – soaring from $139 billion in 2001 to $573.5 billion in 2022¹. This rapid growth is well illustrated by the development of ASML’s market capitalisation below.

Cyclicality and Semiconductors

Most recently, the semiconductor industry has faced global supply chain disruptions, triggered by the Covid-19 pandemic. While some sectors, notably automotive, faced reduced orders, most, such as consumer electronics, saw unprecedented growth due to the shift to remote working. US sanctions on companies with ties to China, combined with factors such as the 5G rollout, the Russia-Ukraine war and severe weather events, added to sector volatility. Semiconductor manufacturers responded to heightened demand during the pandemic by increasing inventories, supported by government subsidies. However, the end of the consumer electronics replacement cycle resulted in an industry slowdown in the latter half of 2022 and excess chip inventories.

A year later, inventory levels stabilised, particularly in the global IT components sector, marking a turning point in the cycle. TSMC’s revenue, a key indicator of industry health given they manufacture around 90% of the world’s advanced chips, rose by 14.4% in Q4 2023 from the previous quarter². Some concerns persist regarding oversupply, especially for foundational chips, as Chinese chipmakers continue to increase production. Nonetheless, the industry is expected to maintain its upward trajectory, with sales revenue estimated to reach between US$588-613 billion in 2024, surpassing 2022’s record of US$574 billion, and 2027 forecasts come in around US$736.40 billion³.

Geopolitics and Semiconductors

The global shortage of semiconductors provided a wake-up call for many governments, particularly in the US and Europe as it served to highlight the vulnerability of over-reliance on the global supply chain. In response, governments began efforts to de-risk their supply chains through onshoring and nearshoring production. This trend has proved beneficial to some players in the supply chain as the total addressable market for existing suppliers increases in line with an increase in capacity and production. For example, Park Systems, which supplies wafer inspection equipment, is benefitting from the increasing demand of smaller nodes and the corresponding expansion of manufacturing lanes.

The US government’s 2022 CHIPS Act is a prime example of efforts to onshore. It allocated $52.7 billion⁴ in federal subsidies to support domestic chip R&D, manufacturing and workforce development. Just recently, President Biden announced up to $8.5 billion direct funding to US chipmaker Intel under the CHIPS Act to fund new chip plants in the US.

The US government-imposed restrictions on the export of advanced chips and chip manufacturing equipment to China in October 2022, and tightened the restrictions in November 2023. The move was intended to pre-empt the prospect of Chinese global dominance in the industry, as the Chinese government also sought self-sufficiency. However, the move has yielded mixed results. While it has hindered China’s progress in advanced chip manufacturing and AI development, leading to a focus on foundational chip manufacturing instead, it has likely accelerated China’s path to self-sufficiency by making this an even higher priority for Beijing and forcing Chinese companies to be more innovative in order to develop their own advanced chips. For example, in October 2023 Beijing announced a $40bn state-backed fund to boost the semiconductor sector, and at the same time, scientists at China’s Tsinghua University announced the development of the world’s first fully system-integrated memristor chip in October 2023, with significant applications in AI and autonomous driving⁵.

Semiconductors and Artificial Intelligence

In 2024, the consumer electronics sector is poised for solid growth with a forecasted 3.5% and 4% increase in PC and smartphone sales respectively according to Gartner. This upswing is fuelled in part by a new notebook renewal cycle, as well as a wave of smartphone replacements driven by on-device AI, which allows smartphones to process data within the device rather than on a remote cloud server; this reduces security issues and enables AI services without internet connection. This development, we believe, will benefit a number of our portfolio companies that cater to this industry. One example is Elite Material, a key supplier of high-density copper clad laminates, a crucial component used in advanced chip production. Another example is LEENO which is set to see higher revenue growth in 2024 given their significant R&D exposure to on device AI.

NVIDIA’s recent Q4 2023 report of a 265%⁶ increase in quarterly revenues from one year ago serves as a prime example of the substantial growth AI can drive, with CEO Jensen Huang asserting that AI has reached a ‘tipping point’. The seemingly limitless potential of the AI revolution will sustain growth in the semiconductor industry for years to come, benefiting well established companies like NVIDIA and Arm, as well as lesser-known businesses in our portfolio that cater to such industry giants.

eMemory Technology

Within the semiconductor industry, eMemory, a world-leading IP provider to over 2,400 foundries, IDMs and fabless companies, is a prime example of the type of company we like to invest in, with deep moats, sound balance sheets and a strong outlook based on sustainable growth and expansion. In a recent quarterly earnings call, chairman Charles Hsu summarised their strong growth potential: ‘‘Our total addressable market will increase as the world expands foundry capacity and move toward more advanced technology. Our technology coverage in each foundry will increase as more technology processes develop and more fabs are established.’’ To this end, the company has several advanced 3/4/5nm semiconductor projects underway and has successfully licensed its 3nm OTP and PUF technology to a US foundry customer with whom it will work to develop the most cutting-edge processes. In addition, the royalty income for each foundry is increasing, as is the demand for licensing, resulting in increased licensing income, all of which increases eMemory’s profitability.

The promising outlook for eMemory, which will very likely profit from both increasing semiconductor capacity and complexity, is reflected in the positive outlook for many of our other portfolio companies. For example, LEENO, (see Company Spotlight in our Q1 2024 Manager’s Commentary) should be benefiting from the increasing complexity of chips, which require more advanced pins and sockets for testing in the R&D phase.

Outlook

The expanding total addressable market of semiconductor end markets, facilitated by this expansion in semiconductor capacity and complexity, suggests we may come to see a potential reduction in the industry’s cyclicality. The industry may become increasingly shielded from the vulnerabilities associated with single market trends with dampened demand in one sector likely having a less pervasive effect on the overall semiconductor industry and its supply chain. Furthermore, many of the new end markets, such as automotive, industrial automation, 5G infrastructure, AI and cloud computing, have larger chip demands per unit compared to those associated with consumer electronics. The outlook for the semiconductor industry is positive, not just for 2024, but for the next decade. Despite historical peaks and troughs, the industry’s overarching trend is one of exponential growth, with forecasts pointing to a milestone of $1 trillion in market revenues by 2030.

At MCP, we avoid trying to time each cycle perfectly and instead focus on identifying highly innovative companies that are positioned to benefit from the industry’s long-term trends, such as eMemory. This strategy does not begin and end with the semiconductor industry, but extends to all the industries in which we invest. In this way, we aim to create long-term, sustainable value for our investors.

To find out more about portfolio manager Carlos Hardenberg’s and the MCP team’s insights into the semiconductor industry, listen to Decoding the Semiconductor Industry. This episode is part of our new podcast channel, Insiders and Outliers – MCP on Emerging Markets. Monthly episodes are available on Spotify, Apple Podcasts and Soundcloud.

¹ SIA

² TSMC

³ Statista

⁴ The White House

⁵ CSIS

⁶ NVIDIA

On 26 February 2024, South Korea’s Financial Services Commission (FSC) together with the Korean Exchange (KRX) announced the country’s Corporate Value Up Programme. Similar to, and most likely inspired by, Japan’s decade-long initiative, the aim is to raise valuations and boost shareholder returns. This is a move to address the so-called ‘Korea discount’ where listed companies tend to have lower valuations compared than their global peers. In fact, over two thirds of listed companies on the Kospi have a price-to-book (P/B) ratio of less than 1¹.

Source: Bloomberg

A significant contributor to the Korea discount is weak corporate governance standards, particularly within the notorious chaebols – wealthy and influential family-owned conglomerates like Samsung, Hyundai Motor and LG. Chaebols have traditionally prioritised maintaining control over maximising shareholder value and including minority shareholders in active participation. One notable example is the deliberate suppression of company value to minimise the blow to the next generation when it comes to paying the hefty 50-60% inheritance tax. However, it’s important to recognise that while chaebols play a crucial role, there are other factors contributing to the discount, including traditionally low dividend payouts and inefficient asset utilisation among Korean companies.

The Corporate Value Up Programme is a set of voluntary guidelines encouraging companies to devise mid- to long- term plans and targets to increase shareholder value, with board members playing a key role in the implementation. Companies are encouraged to disclose these plans annually on the KRX website. Korean financial regulators have emphasised that there are significant financial incentives for companies to participate in the programme, claiming that the incentives will exceed those offered by Japan in its equivalent initiative. In addition, best practice companies (those with a proven track record of profitability or those that are expected to boost valuation) will be included in the upcoming Korea Value-up Index, the other major pillar of Korea’s efforts.

The Korea Value-Up Index, to be introduced in June, mirrors Japan’s JPX Prime 150 Index by including companies that are making efforts to improve their valuation. The purpose of the index is to create a market environment that promotes investments in such companies, makes them more accessible to retail investors and enhances market transparency. Pension funds and institutional investors will use the index as a benchmark, and ETFs tracking the index are expected to be launched by December. Evaluations of key financial indicators, including P/B ratio, price-to-earnings ratio and return on equity will be part of the index’s criteria. These indicators, along with dividend payouts, will be regularly published on the KRX website.

Concerns have been raised about the lack of detail in Korea’s Value Up Initiative, particularly regarding the unspecified tax incentives the FSC places great emphasis on. Another source of disappointment is the voluntary nature of the programme; without enforcement companies may not take decisive action to improve valuations, rendering the initiative meaningless. As a result, the Kospi Index fell by 0.8% on the day of the announcement².

The FSC has responded to such criticism by stating that is it more realistic to provide powerful incentives than to enforce cooperation, and that final guidelines will be announced in June. The FSC has also stressed the importance taking a long-term view. Chairman Kin Joo-hyun stated that “enhancing the corporate value of a company is not something that can be achieved in a short period of time with only one or two measures.”

A look at Japan may help to better understand Korea and its initiative. Japan has faced similar challenges of low valuations and shareholder returns since its market crash in 1987. As a result, the country embarked on a corporate governance mission over a decade ago. Efforts ramped up last year when the Tokyo Stock Exchange (TSE) announced in March that listed companies with a P/B ratio of less than one must submit a plan to improve capital efficiency. In October, the TSE announced its ‘name and shame’ measure whereby from January 2024 it will publish a list of companies with poor shareholder returns that have disclosed these plans, thus indirectly calling out companies that haven’t. These efforts are finally bearing fruit as the Nikkei 225 hit a 34-year high on 22^nd Feb closing above 39,000 points³. Many investors are putting Japan back on the agenda in 2024 after a 34-year hiatus.

So, what lessons can Korea learn from Japan? While Korea’s initiative may result in little change in the short-term, due to its unspecified and voluntary nature, it should not be deemed insignificant. Given that Japan’s reforms took over a decade to take effect, Korea’s equivalent reforms should not be expected to happen overnight but should be considered an important starting point for long-term improvements.

¹ Bloomberg

² Bloomberg

³ Bloomberg

As China enters a new year it is fitting to draw a comparison with this year’s zodiac animal, the dragon. Undoubtedly, the Chinese economy could do with a bit of luck and strength, attributes associated with the dragon. However, the key question remains: will the market heat up or will investors just get burnt?

Rewind one year and investors were projecting a strong recovery in China given a long-awaited farewell to its zero-Covid policy. This optimism was short lived. The rally in China’s stock market quickly tailed off as structural problems became alarmingly apparent. Deep-seated problems in the property sector, with defaults by major developers led by property giant Evergrande, had a knock-on effect on domestic lenders. FDI flows, domestic manufacturing, exports and consumer spending all remained weak, exacerbating China’s deflationary cycle. Such issues left Chinese equities trading at record lows.

However, a closer look at key metrics could indicate a disconnect between market sentiment and the reality on the ground. Box office sales increased in 2023, domestic tourism is booming with planned travel expenditures for 2024 surpassing 2019 figures, and car sales are reaching unprecedented highs. These are all important signals for a potential rebound in consumer spending this year.

Furthermore, the Chinese government has initiated measures to strengthen domestic demand, support the stock market and shift away from an over-reliance on infrastructure and real estate investment. A recent measure by Beijing to mitigate selloffs in the market and promote stability comes in the form of increased purchases of onshore Chinese stock market ETFs by state and sovereign wealth funds.

While measures so far have fallen short of substantial fiscal interventions many investors hoped for, the cumulative impact of the government’s smaller-scale initiatives should not be ignored. Furthermore, China’s upcoming National People’s Congress (NPC) session on 4-5 March is a key annual meeting where economic and social development plans for the year will be unveiled. Analysts expect a GDP growth target of 5% and the announcement of further measures to boost growth, support demand and improve the business environment.

So, given China’s attractive valuations, improving consumer sentiment and increasing fiscal support, why do we continue to invest cautiously in China?

First of all, despite some positive signs, structural challenges remain. 70% of household wealth is tied up in property, and the crisis is by no means over. Property investment and new construction dropped 9.6% and 20.4% respectively in 2023¹. Furthermore, Evergrande’s liquidation order in January and the liquidation petition filed against Country Garden on 28^th February are exacerbating the lack of confidence in the property sector. This may lead to an extended period of cautious consumer spending.

Additionally, the CCP’s intervention in the economy, coupled with lower corporate governance standards among Chinese companies compared to their Asian EM counterparts, continue to steer us away from direct investment in China. The CCP’s near destruction of the EdTech sector in 2021 is a prime example of the regulatory risks inherent in the country.

Finally, when it comes to companies, we rarely find the level of governance, fundamental quality and innovation that would meet our investment criteria. Instead, we prefer to access the Chinese market indirectly through countries such as Taiwan and South Korea which also benefit from improving consumer sentiment in China. For example, our portfolio includes Elite Material, a Taiwanese company specialising in components for the semiconductor industry. It operates manufacturing facilities across China and generates a significant proportion of its revenues in the country while offering Taiwanese standards of governance and transparency.

No investor can afford to ignore the world’s second largest economy and China is still forecast to grow by 4.6% in 2024², much faster than any developed market economy and many of its emerging market peers. So, we continue to scour the Chinese market for exciting companies that meet our quality investment criteria.

¹ National Bureau of Statistics of China

² IMF World Economic Outlook Growth Projections, January 2024

As we reflect on a volatile year 2023, we are reminded of the words of Winston Churchill: “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

The year unfolded with global fears of inflation, coupled with concerns over the ongoing conflict in Ukraine and uncertainties surrounding the US and European economies. A sluggish recovery in China and unsettling events, such as the terrorist attacks in Israel and the ensuing conflict added layers of complexity and prompted cautious positioning by investors.

Since our launch in 2018, MCP has weathered a pandemic, geopolitical turbulence and economic shocks. Our strategic choices, based on a rigorous focus on quality, careful selection of management teams and business models, and a vigilant awareness of macroeconomic and company-specific risks, have steered us through these turbulent waters. We avoided investing in Russia and had almost no direct exposure to China. By taking advantage of the opportunities presented by market conditions, the Mobius Emerging Markets Fund (MEMF) has generated sustainable long-term returns, culminating in a five-year track record of significant outperformance, with return of 26.9% (Private C USD Founder, as of 29 September 2023) since inception compared with the MSCI EM USD Index return of -8.6%. In the current year alone, MEMF has outperformed the MSCI EM Index by an impressive 10% (as of 29 December 2023).

One of the exciting companies that have contributed to our success is Classys. Founded as a family business in Seoul in 2007, Classys is the global market leader (ex-US) in non-invasive medical aesthetic devices with a 30% market share. Its cutting-edge devices use high-intensity focused ultrasound (HIFU) and radio frequency (RF). Classys’ “razor and blade” business model, which sells both medical devices and cartridges, has led to continuous gross margin improvements. Although the company is already present in 70 countries, its expansion into the US and China offers immense growth opportunities. In the third quarter of 2023, Classys again reported robust results, driven by product innovation and geographic expansion, and has provided positive guidance for FY24.

This positive momentum is not limited to Classys; it is evident across our portfolio. In particular, our technology holdings are seeing inventories normalise and demand pick up. Our quality portfolio companies have demonstrated resilience and adaptability, and as business and consumer spending continues to improve, our companies will benefit from the recovery. Although developed markets outperformed emerging markets in2023, low valuations, a potentially weaker USD and expected higher growth suggest a positive outlook for emerging markets in 2024.

We recently announced Mark Mobius’ well-deserved retirement from Mobius Capital Partners. We would like to express our gratitude for his mentorship, leadership, and the remarkable energy and passion he brought not only to the business but also to our lives. The firm and its vehicles continue seamlessly under Carlos Hardenberg’s leadership, supported by our exceptional team of passionate and dedicated analysts. We are committed to continuing to deliver superior long-term returns over the next decade.

We thank you for your continued trust and support. As we embark on the exciting path ahead, we wish you a happy and prosperous New Year. Thank you for being an integral part of our journey.

The Mobius Capital Partners Team

We have recently returned from a research trip to India, a visit we had been very excited about as we had missed in-person interactions with our holdings and interesting businesses that we have been following for a while. While our regular calls and meetings in London have allowed us to stay in close contact, a personal meeting with CEOs and managers on site cannot be substituted.

India in the Portfolio

India has been an important allocation for the Mobius Emerging Markets Fund since its inception. MEMF’s Indian holdings have contributed 40% to (gross) return as of the end of March 2023. This was almost entirely driven by stock selection. Our visit has confirmed our bullish outlook on the region, and the exciting companies diligent stock pickers can find in India.

Some Important Facts about India

India, a country of 1.4 billion people, and soon expected to be the most populous country in the world, offers a plethora of opportunities for us as long-term, quality-oriented investors. Companies have evolved, are increasingly more professionally managed, and are focused on corporate governance and sustainability efforts, which has helped in attracting domestic and foreign capital flows. Innovation is omnipresent, and India has created 100 unicorns in the last five years. Unrelenting deal activity in PE and VC also means new and innovative businesses available to invest in as public market investors. There are over 6,000 listed companies in the small- and mid-cap space.

Growing Middle Class

In India, we observe income inequality and a changing social fabric, as in most other emerging markets, but are convinced that rapid income acceleration, technological adoption and corporate spending—aided by favourable economic and fiscal policies—will keep India on a steady growth path. GDP per capita has quintupled over the last 20 years. By 2030, the Indian economy will be led by the middle class, and upward income mobility will continue to drive consumption.

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The Growth Premium

In its latest World Economic Outlook, the IMF forecast India to grow 5.9% in 2023 and 6.3% in 2024, more than any other major economy. This compares to 1.3% and 1.4% projected growth for advanced economies. The Indian economy clearly has recovered from the pandemic-related slowdown and is now on an impressive, sustained growth trajectory for the next decade. Growth will primarily come from the increase in private consumption (and we have witnessed this on the ground with busy markets and fully occupied restaurants and shopping malls) and will be fuelled by a broad-based expansion of capital expenditure by the private and public sectors.

Supportive Government Policies

We view the recent economic policies—including increased spending on infrastructure, incentives to boost certain niche manufacturing segments, focus on improving ease of doing business and fiscal measures undertaken to keep inflation in check—largely positively. Shortly before our visit, India’s government announced a raise in capital expenditure of 33% to 10 trillion rupees ($122.29 billion) in the next fiscal year to drive investments in infrastructure. We witnessed first-hand rampant construction activity across the cities we visited. The scale of expansion of the Metro (public rail transport) is mind-boggling and is being talked about by everyone we met. Further, construction of new expressways, bridges and airports continues to support the public infrastructure and we see this as a good indicator of the economic growth the country is witnessing.

Digitalising the Financial System

Another key driver of economic growth is a healthy credit cycle with multiple banks competing and lending activity again on the agenda. Our interactions with small and large banks also point to the good health of corporate credit in India which is the cornerstone of future expansion. India’s financial system has made significant progress in efficiency with technology and innovation becoming mainstream. The digital payment system UPI is basically used by every Indian and has almost replaced cash entirely (UPI enabled approximately 2,300 transactions a second in 2022). Ever-increasing smartphone penetration, combined with the government’s efforts to reduce cash transactions, has brought the majority of the population into the digital payment ecosystem. As a result, about 80% of Indians own a bank account today, a significant change from only five years ago.

China plus 1

During our visit, the world was surprised to learn about one of the largest airplane deals in recent history with Air India (the erstwhile national carrier, now owned by the Tata Group, among India’s largest conglomerates) ordering over 400 planes from Airbus and Boeing. Our visit also coincided with several global investor summits and G20 meetings and we constantly heard of the large-scale investments across diverse sectors such as manufacturing and renewable energy. India’s recovery and robust position is clearly no secret, and a term we heard everywhere was ‘China plus 1’.  Although we don’t invest directly in airlines, infrastructure or asset-heavy manufacturing companies, we have found small businesses that fit our quality criteria and are poised to benefit from these sectoral tailwinds. As part of our research, we met over 20 companies during our trip in addition to economists, local fund managers, entrepreneurs and private investors.

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Our Portfolio Holdings

The most satisfying finding from our trip was that our holdings are doing even better than we had expected. APL Apollo Tubes, one of our key holdings for over three years, had just reported its highest ever quarterly volume of 600k tons of steel tubes. The passion and the vision of the founder MD, his attention to detail and strong intent to professionalise the organisation with the right talent, continues to impress us. We are firm believers in investing in companies with good culture and this meeting with the MD reaffirmed APL’s focus on their culture—employees are considered family. During the visit to the warehouse of a distributor to APL for 10+ years we clearly saw the brand appeal and scale of distribution of APL Apollo superseding that of their peers. At a visit to one of their plants, we witnessed the highly efficient manufacturing process with >90% of energy needs met through renewable energy.

A key holding—and one of the top performers for us since inception—is Persistent Systems, a global digital engineering company that differentiates itself from the other IT companies in India by catering to a niche customer segment. Despite the macro headwinds, Persistent continues to be among the fastest growing companies and has kept up its trajectory of new deal wins. All our interactions with competitors and other investors highlighted the quality of management, the recent success in reorganisation and its ability to continue to grow in a difficult market. We remain firm believers in their long-term success and have successfully engaged with the company on various initiatives over the years.

A New Investment

We continue to find similar promoter-run businesses in India led by professional management teams and with a clear succession plan in place. One such new addition to our portfolio is CE Infosystems (MapMyIndia), a small yet exciting business that is a domestic leader in providing geospatial technology and automotive navigation solutions in India (please also see Company Spotlight above). Our interactions with the founding family—including the CEO and the heads of different businesses who have been with the company for over 10 years—highlighted the importance of culture in the organisation. Promoters have gradually transferred ownership in the form of ESOPs to key employees, even before ESOPs became common among tech companies in India. Coincidentally, CE Infosystems was celebrating its 25th anniversary on the day of our visit and were preparing for an organisation-wide cricket tournament. After our visit to their experience centre and the interactions with the team, we walked away with the feeling that they can innovate continually and combat disruption, while maintaining their sticky customer base.

Conclusion

India will remain an exciting country for us, and we will watch closely as the country is headed into elections in May 2024 during which the incumbent government needs to successfully navigate current economic headwinds for a third victory. During our trip we identified new potential investments in niche segments within financials, manufacturing and technology sectors which would benefit from the longer-term opportunities the country offers across consumer and corporate spending.

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Emerging market investors have witnessed troubled waters over the past few years: a global pandemic that had a negative impact on trade, consumption, and supply chains; increased geopolitical tensions between the US and China; a war in Europe with wide ramifications for global trade and fiscal policies resulting in rising inflation, tighter monetary policy, and appreciation of the US dollar. Furthermore, volatile commodity prices that benefitted a few countries but hurt many, and very difficult capital market conditions made it particularly difficult for emerging markets. In summary, all of this has led to very low confidence, record capital outflows, and a sell-off of the asset class. Over the last 10 years, emerging markets have delivered close to negative real returns on an annualised basis. After this prolonged period of weak performance, we now see several indicators suggesting that the tide is turning.

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Valuations at a Record Low

Investors should never lose sight of valuations. At the moment, we are witnessing record-low valuation levels in EM — the current average price-to-book value at nearly 1.5x is in the 30-year bottom quartile. The current P/E and EV/EBITDA market valuation indicates that emerging markets are trading at the largest discount to developed markets since 2008. At the same time, many emerging market currencies are currently undervalued.

Inflation and Monetary Easing

Inflation pressure in the US is moderating. Inflation declined to 6.5% in December compared with a year earlier, down from 7.1% in November. The slowing pace in inflation is a clear indicator that the Fed’s rate-hiking cycle is nearing its peak and monetary policy is expected to ease. Many emerging markets are ahead of developed markets in the hiking cycle and inflationary pressure, especially in Asia, remains contained. Developed markets saw an inflation increase from around 1% to around 7% on average, while inflation in Asia averages around 4%.

Highly Innovative Businesses in EM

Over the past 20 years, business models in emerging markets have significantly evolved. Investors can find highly innovative companies with unique business models led by excellent management teams that are still relatively undiscovered by the market, and currently most certainly under-owned. The new driver in emerging markets is technological innovation in areas including, but not limited to, factory automation, autonomous driving, renewable energy, AI or Internet of things (IoT), as well as digitalisation and modern and efficient service offerings. We are particularly interested in companies with predictable and stable recurring revenue streams and stable margins, for example in the software development industry.

Ever-growing Consumption and Faster Real Wage Accretion

a Favourable demographic dynamics and urbanisation in emerging markets remain structural tailwinds for the long term. The middle class in emerging economies is younger, increasingly more educated, and has demonstrated accelerated adoption of oechnology. The macroeconomic growth, combined with technological innovation, has yielded higher wage growth and disposable income in these countries. This in turn will result in higher spending and boost domestic consumption. For example, Taiwan and South Korea are expected to jump ahead of Japan in terms of GDP per capita in 2022–23.

Corporate Earnings Recovery

The corporate earnings recovery will be driven by the reopening in Asia. The average EPS growth forecast over three years annualised (CAGR) for the MSCI EM Index is 13% and for MEMF’s portfolio 15%.

US Dollar Rally Losing Steam

The US dollar rally is losing steam on the back of favourable inflation data, easing the pressure on emerging market currencies, debt, and monetary policy.

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Relaxation of Chinese Zero-Covid Policy

Chinese economic activity — that is, consumption, trade, and mobility of its population — has been radically weakened during “zero-Covid”. Now, for the first time in years, there are clear signs that China is relaxing its zero-Covid policy which will have a very positive impact on growth and supply chains. We must be mindful and prepare for a stony path to the recovery. Exports this year could be negatively impacted by weak demand from the EU and the US, booster rates among the elderly in China remain very low and the desire to reach herd immunity can take time. However, a post-pandemic recovery in China will not only serve as a domestic impulse, but positively affect all countries which trade with China, particularly in Asia.

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Conclusion

We have heard many differing opinions about what investors can expect from the coming year. We share the view of Neil Armstrong that, “We predict too much for the next year and yet far too little for the next ten.” And one longer-term prediction continues to hold true: a recovery is still to come. A recovery not from one bad year, but a recovery from a pandemic of an unprecedented scale,- at least in living memory. As always, markets will price this in first. We have already seen a gradual reversal of fund flows back into emerging markets.

At Mobius Capital Partners, we continue to focus on the long-term potential of our companies which are catering to growing trends like digitalisation, quality health care, factory automation, and renewable energy and on creating long-term, sustainable shareholder value for our investors.