From the CIO’s Desk

11) September 2022

The times they are a-changing

Published On: 07-September-2022

Imagine opening the newspaper and seeing an advertisement of a new business reality TV show, which features inventors and their inventions! Where are the full-page ads of the television serials, you wonder? Are the days of melodramatic soaps behind us, or have they made space for more aspirational content to match the mood of a new India? The times sure seem to be changing!

I was reminded of the changing times at a recent event, where I had the opportunity to listen to a legendary banker who helped build one of India’s leading institutions. He pointed out how people of his generation aspired to land government jobs. Then, with liberalisation in the 1990s, aspirations changed, and parents encouraged their children to work for large private companies and MNCs. As for Millennials and the Gen Z, the aspiration is to be entrepreneurs.

This trend is visible in the number of entrepreneurs who have been graduating from leading engineering colleges. In May 2022, Moneycontrol reported that 73 of India’s 100 unicorns have at least one founder from the country’s 23 IITs. According to data analytics firm Tracxn Technologies, BITS Pilani's alumni have founded more than 900 startups, with 13 of those making it to the list of Indian unicorns.

Clearly, the ambition of this generation is leading to a sea change in the environment, both in terms of birth of new entrepreneurs and the funding system to support them.

It is heartening to know that some Indian cities feature among the top emerging start-up ecosystems in the world, with IT hub - Bengaluru claiming the number one spot in Asia and the fifth rank globally for tech venture capital investment this year (Source: Business Standard, Startup Genome, June 2022).

The Business Standard report also highlighted Bengaluru’s formidable status as the tech capital of India, with an ecosystem value of $105 billion — higher than the value of Singapore ($89 billion) or Tokyo ($62 billion). Further research by data intelligence platform showed that in the first five months of this year Bengaluru’s tech firms raised $7.5 billion in VC funding, which is much higher than the record of $5.2 billion raised during the first six months of 2021.

Bengaluru, the ‘Silicon Valley of India’, is now attracting more investments than hubs in Singapore, Paris or Berlin. It is also trailing closely behind Greater Boston and New York.

A perceptible shift

As I travelled across Europe and UK last month, I met a diverse set of global investors encompassing asset managers, pension fund and insurance companies, private wealth managers and family-owned businesses. This was my first in-person roadshow in nearly three years, thanks to the pandemic, and I could sense a perceptible shift in the conversations.

While it is not uncommon for some investors to allocate into an India dedicated fund, most investors prefer an Asia and Global Emerging Market (GEM) for their asset allocation. This time, however, a significant number of investors indicated a shift in their allocation strategy — with an ‘India allocation’ being carved out from their investment universe. They may no longer rely solely on the look through exposure they gain to India by investing in an Asia or GEM strategy.

According to Bloomberg (September 2022), India’s country weight, with 108 members, stands at 14.48% of the MSCI Emerging Market (EM) Index as of end-August, while China dominates with about a third of the index weighting. Rising geopolitical tensions and concerns about the future of US-China relations are causing investors to re-evaluate their emerging market strategy.

Russia, formerly a part of the EM basket, was removed from benchmarks earlier this year and has since become a non-investable market for global investors. Before the Ukraine conflict led to its removal, Russia’s weight stood at 4% of the EM benchmark at the start of the year.

As geopolitics takes centerstage, investors have begun to consider the risk posed by their exposure to China. Hypothetically, if they were to consider allocation in an EM basket excluding China, it would raise India’s weight to approximately 20%. In a world of rising US- China tension, India could well emerge as the key economy in the Emerging Market allocation.

For now, India’s chosen, and publicly articulated choice of strategic autonomy appears to be well understood and appreciated. This could be one of the factors behind the sharp outperformance of India v/s the EM basket and China over the past year.

In fact, a lot of the handwringing over the performance of Indian equities is misplaced. Those who are upset about the drop in Indian equities from its highs of last year would appear unaware of the strong relative performance of India v/s equities in other geographies. We would also point to the high starting valuations of Indian equities in late 2021 as being a proximate cause of the poor returns since then.

However, it is not my purpose to connect the dots and leave you with an outrageous forecast for stock prices or flows. We are not in the market forecasting business or for that matter in the business of forecasting fund flows.

Our ScoreAlpha investment process guides us in the choice of stock picking, while the guard rails of each individual strategy determine portfolio construction. The ScoreAlpha investment process neither involves making market forecasts nor involves forecasts about who will buy or sell, now or in the future.

We are the buyers of businesses at valuations that make sense to us, and for this purpose, we rely on a wide range of metrics appropriate to the business under consideration.

We are not guided in our portfolio decisions or processes by either the quantum of SIP flows from domestic investors or the flows from foreign investors. What matters is the cash flow and the return on capital that a business generates. As equity investors, we generally have a sunny disposition and believe in a better tomorrow.

Stock prices will always reflect the emotion of investors. Mood of investors will swing between pessimism and optimism — the only factor that does not change in the world of investing. Investors would be well served if they are guided in their asset allocation by their financial goals and market valuations. These will allow investors to counter the swings of the pendulum and not fall prey to the mood swings of Mr. Market!

Above commentary is published in UTI Fund Watch (monthly factsheet) in the section of Update from CIO’s Desk, click here to refer to the factsheet.

Author Bio

Vetri Subramaniam
Vetri Subramaniam is the Chief Investment Officer of our Company. He holds a B.Com degree from University of Madras and a Post Graduate Diploma in Management from Indian Institute of Management, Bangalore. He joined our Company with effect from January 23, 2017. Prior to joining our Company, he was associated with Invesco Asset Management Private Limited, Motilal Oswal Securities Limited, Kotak Mahindra Asset Management Company Limited, SSKI Investor Service Private Limited and Kotak Mahindra Finance Limited.