Mark Draper (GEM Capital) caught up with Andrew Clifford (Chief Investment Officer - Platinum Asset Management) at a conference recently to discuss his recent investment research tour of India.
Platinum Asset Management are extremely bullish on India following the leadership change.
Here is a podcast of the interview, followed by the transcript.
Mark Draper: Mark Draper from Gem Capital here with Andrew Clifford, chief investment officer from Platinum Asset Management. Jet lag from India, just come in a day or so, thanks for joining us Andrew.
Andrew Clifford: Yeah, not at all.
Mark Draper: And you’re really excited about India. You think it is a very interesting investment prospect going forward. Why do you think that?
Andrew Clifford: Look India has been a place of enormous potential that we’ve all known for a while, but the big issue has been, you know the basic inability of the government to set up the right environment for investment to occur, and to a large extent that has been about the government unable to get approvals through their own system and so forth. And a lot of this comes back to ultimately bureaucracy which is incredibly inefficient but also with a fair degree of corruption within it. So, what we have in this new government is a prime minister, Mr Modi, who has won clearly has a vision that investment is required to get this country moving. He is able to sell that message to the electorate very convincingly that that is good for all Indians, it’s not just being about being pro-business and he has the experiences of a politician as the chief minister for 10 years of Gujurat to understand this system and know how to make it work, with some very interesting ideas about how you to clean the system up.
Mark Draper: And one of those ideas involves the national security card, like the I.D, not a card but the I.D system. Are you able to talk us through that?
Andrew Clifford: Yes. Well, there are probably a couple of elements which are quite interesting here. One is Modi talks about digitalising India and so if you can imagine that for any sort of thing that you want to do such as build a house, start up a business, there are a whole lot of permits, licences that you need and one comment we got from one business person was that in reality it wasn’t very different from the US or Australia, we need those but they are in formality but whereas in India each one of those things we need to do, you have got another bureaucrat to deal with or another government official. By making this an internet process, based process, you essentially, you may still need someone to look at it at the end of the day to approve it but you’re not meeting them face to face where there are time constraints put on the official dealing with it and they can either accept or reject the application based on its merits alone, there is not real opportunity then for them to sort of fleece a little bit of cash.
Mark Draper: Yes.
Andrew Clifford: So that’s one, and that’s clearly something they’re heading down in all levels of government and it’s very much one of his things, his things even the ministers or ministerial level is that a file shouldn’t be sitting on your desk for more than a certain number of days because if it is you’re not making a decision and that not making a decision often has a lot to do with saying what money making opportunities are in there for you.
Mark Draper: Yep.
Andrew Clifford: The I.D card itself is very interesting so there are now 700 million Indians with a unique identification which is simply by your 10 fingerprints and an iris scan of both your eyes and you’re given a 12 digit number.
Mark Draper: Right.
Andrew Clifford: And it has enormous possibility so…
Mark Draper: Almost sounds like something out of James Bond doesn’t it.
Andrew Clifford: Well, the interesting thing is that in our society, you would feel very wary about such an identification and what the government’s going to do with it. Here it is about protecting you from the system…
Mark Draper: From the bureaucracy.
Andrew Clifford: So, for example, a very simple thing you can walk into a bank branch now and type your 12 digit number in, give them your fingerprint and within two minutes, you’ve got a bank account. Simple as that. What does that allow you to do, well it means that rather than having to go, for example, off to a government office to get your monthly pension, if that’s what you’re doing, it can be paid directly to your account and is paid directly to your account. So, again, when you went to grab that pension, it was something that again, you may not have got the full amount of, again some of it was kept back by the guy handing out the money.
Mark Draper: Yep.
Andrew Clifford: So, that’s a simple example, but in India there’s a lot of subsides subsidised, LPG gas, subsidised kerosene, there are various effectively social security type benefits and all of these things can be tied down to your I.D number and what they are finding is that where they have done that, then again most of these things are only on an experimental basis, none of these things have been rolled out on the country yet, but where they have done it and said okay you’re not going to get your pension unless you sign up using their I.D, they have found that there’s only 70% of the people are real.
Mark Draper: Right.
Andrew Clifford: The rest are ghost accounts. So there are massive benefits in terms of cutting down on the amount of subsides and what goes out in the system. So there are some quite clever things that can be done with this overtime.
Mark Draper: What do you think the impact on foreign investment to India of clamping down on corruption and improving the system and as well as encouraging investment, what’s your view on where that’s likely to go?
Andrew Clifford: Well, it’s quite interesting because Modi, I think, is now perhaps the most travelled Indian prime minister already and very much the focus of all his travels have been about trade and investment and I think it is interesting because the multi-nationals are very wary of investing in India for various reasons, you know the tax offices have been quite punitive in their dealings with, and unfair, dealing with foreigners, so there’s a great deal of wariness and her is aware of this and knows that we need to get things set up so that foreigners will invest. There are a lot of rules and restrictive rules around investing in India and again, I think there’s a sense that if they want, for example, a modern retail industry they need foreigners in, to some extent.
Mark Draper: Yes.
Andrew Clifford: And so, not all of these things are going to happen overnight but bit by bit I think we will, overtime, see a different India as far as encouraging foreign investment in the country.
Mark Draper: Can you give us a feel for the size of the place? I mean living in Australia with 24 million people, just by comparison.
Andrew Clifford: Well you know, I think the population is now1.2 to 1.4 billion and it is a place of, you get outside of a city like Mumbai and Delhi, if you have visited them over the last 20 years, they have developed quite a bit, but once you get outside of that we are really talking about places, in terms of my travel remind me of going back to China 20 or more years ago in terms of simply the lack of development or very little way of modern retail or shopping malls. There’s some but nothing like what you would see in China today once you get into those second and third tier cities.
Mark Draper: Yeah.
Andrew Clifford: We talk about it, you know there’s the number of Indians with a mobile phone but the reality is, in terms if things like 3G, they are already talking about rolling out 4G but again once we, in our recent trip outside of Mumbai and Delhi and we visited three other cities, you barely pick up or there was no 3G signal effectively, so there was an enormous opportunity for growth across a vast part of the country simply by the government letting investment occur.
Mark Draper: And investment in telecommunications would be one area, what would be some of the other areas, do you think where the government is really going to encourage investment?
Andrew Clifford: So you know what is interesting in one of the discussions that is always around subsides and prices of goods and services, but there is cry of like Indians; they want power, they want water, it’s not the price of it that worries them because one area where we visited, they were very enthusiastic saying they were quite privileged because they got electricity 12 hours a day. And this is the reality outside of most of the, outside of Delhi and Mumbai and maybe the central parts of the cities is that no electricity really is sort of a few, maybe five to ten hours a day type of proposition then you have got to go to your generator if you want it. So, it is very clear that the country needs power, it needs roads, it needs infrastructure to support industries, like rails, ports and the like and so these are all areas where there has been a real logjam in terms of getting approvals through and we’re starting to see a couple of things. One, we are starting to see approvals occur, we are seeing big issues around coal and the accessibility of coal that are now being dealt with in the country and in terms of roads where they have done a lot of private partnerships that haven’t really worked because of the way they were set up and so the government is looking at doing a much simpler sort of structure where they actually, the government is the one responsible for the acquiring the land, getting the rights and way, and then a much more simplified process for a private entity to get these types of assets built.
Mark Draper: And to round off, to what extent have investment managers like platinum and others embraced this or is it just at the early stages, do you think?
Andrew Clifford: I think if you look at the market over the last year, it has been extraordinarily strong stock market, leading into the election or post the election so there is a fair degree of understanding of what is going on here and I think that perhaps foreigners don’t have a strong a grasp of it as they might but the locals certainly have a huge or a very high level of optimism. So generally, that would be to us a bit of a signal that this isn’t the greatest opportunity, certainly if you look at emerging markets funds they have high weightings in India relative to their bench mark but if you look at the global funds they have, they just haven’t even arrived.
Mark Draper: Right.
Andrew Clifford: I think the way we will look at it is that, look it has been a great market but if we are looking in terms of ten year type time frames, we think it is probably what we’ve seen is the first leg of what will be a multi year bull market. It may well mean that we have to, you know prices need to consolidate and maybe the next year ahead may not be that exciting, you know valuations in India have never been quite as low as they have been in places like China and there certainly aren’t many gifts being handed out in that market at the moment but nevertheless in terms of a long term economic development and growth story, we don’t think there is anything like it anywhere in the world at the moment.
Mark Draper: And finally, can you give us a flavour of how you’re actually playing the India theme at the moment?
Andrew Clifford: So we were fortunate to sort of up our investments in India quite significantly at the end of 2012, before the run started and a lot of those holdings are in infrastructure, companies, ports, roads, power which is an area that really was suffering and now it has a bit more promise because of the changes that we have been talking about. Also in the financial sector so private banks we hold and these really are the sort of the core of the portfolio also Bharti telecomm which is the dominant or the largest mobile provider there is another one of our holdings, but there are a lot of interesting players coming into the portfolio around, some of the changes are occurring so what I haven’t mentioned so far is the changes to the energy subsides and so there are some of the companies in India because they are government entities. How they actually had to bear the weight of that subside wasn’t just something the government paid so these companies, their profitability was pressed because of the subside schemes, not only is that changing, it is also again these are companies that have a lot of investing to do, so a lot of potential upside from there so that’s one of the newer angles in the portfolio.
Mark Draper: Okay.
Andrew Clifford: And I just want to say, what’s hard to do in India is to find what we all love to find is the consumer companies because that is clearly a big area of growth…
Mark Draper: They’re pretty expensive.
Andrew Clifford: They are very expensive stocks and there aren’t that many options but we think there will be more and from this trip we have identified a couple of smaller companies within a quite interesting but not yet prepared to talk about what they are.
Mark Draper: Fair enough. Sounds like we are at the start of the Indian journey not the…
Andrew Clifford: I think so, I think you know people say India is like China ten years ago, it’s probably more like China 15 to 20 years ago, I think.
Mark Draper: Okay. Well thanks for putting it in perspective and thanks for the insights into India and I look forward to talking to you more later down the track and I hope you recover from the jet-lag, Andrew thanks.
Andrew Clifford: Okay, thank you.
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