Indian banks
We believe that navigating the long-term complexity and short-term volatility of the Indian equity market requires a nuanced, active investment approach.
A propensity to look for compelling analogues without understanding the underlying economic drivers and risks, for example, likening India to China, can lead to dangerous conclusions and inappropriate portfolio exposures.
Our approach in India, and elsewhere in our universe, looks beyond seductive narratives to appreciate structural drivers and real options, both of which are often unique to individual companies.India’s economic realities have given birth to some extraordinary companies that have been able to turn the country’s longstanding challenges into long-term opportunities.
Long-term growth prospects
A good illustration of that is how Kotak Mahindra Bank and HDFC (both held in the Invesco Developing Markets Strategy) have been capitalising on India’s extensive and ineffective state involvement in the banking sector to support their long-term growth trajectory.
The Indian banking sector today is saddled with more than 11% non-performing loans (source: CEIC as at 29 March 2019) thanks to the reckless behaviours of the public sector banks during India’s credit boom following the great financial crisis.
These banks represent two-thirds of the system’s total assets and almost 100% of the system’s non-performing loans.
Setting the public sector banks on the right path would require overcoming four “R” hurdles:
- Recognition
- Resolution
- Recapitalisation
- Reform
Today these public sector banks have barely cleared the first.
New fire power
As a result, the Indian economic machine is currently running with two-thirds of its financial engines turned off, and only one-third - where Kotak and HDFC play - powering its credit growth.
With their clean balance sheets and excess capital, we believe Kotak and HDFC will continue gaining market share as the public sector banks continue retreating in the upcoming years.
Kotak and HDFC are just two of many extraordinary Indian companies in our portfolio, which illustrate our fundamental, bottom-up investment approach.As volatility increases in the Indian equity market, and global equity at large, we remain focused on finding such companies, paying appropriate prices for them and constructing a durable portfolio that is well-positioned to outperform.
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