Geopolitics, eh? What a hoot. Most of us – fund managers and investors alike – have probably never felt so compelled to pay such close attention to what happens on the international stage.
It almost goes without saying that many of the twists and turns unfolding before our eyes have at their heart a certain D Trump, currently of 1600 Pennsylvania Avenue, Washington DC. He is a busy man, to say the least.
Even in the emerging markets of Asia, where the fund I co-manage does much of its investing, the president’s influence looms extremely large. Take recent developments in India, the world’s fourth-largest economy.
It is only a few months since Trump and India’s prime minister, Narendra Modi, gave every impression of being good friends. While perhaps not as pally as a few years previously, they appeared to be on excellent terms. But then Modi irked Trump by defying a request to stop buying Russian oil.
The upshot: 50% tariffs on around two-thirds of India’s exports to the US. Now Modi seems happier in the presence of two new chums – Vladmir Putin and Xi Jinping – and is showing no signs of yielding to the White House, with some reports even suggesting he is refusing to take calls from the Oval Office.
So a key question is inevitably this: Do the tensions between Trump and Modi mean we should rethink how we invest in India? Without in any way wishing to add to the confusion, I am afraid the answer is yes and no. Let me try to explain.
Big-picture lens versus on-the-ground insight
The reality is that dramas such as this regularly occur in multiple markets. While they might be especially numerous and headline-grabbing right now, the importance of the macro picture must always be acknowledged.
It is therefore perfectly logical – not to mention eminently sensible – to take another look at our holdings in India in light of the tariff situation. This is the ‘Yes’ side of the answer.
Crucially, though, it would be quite wrong to tar the whole country with the same brush. This is the ‘No’ side, and it is somewhat less appreciated.
Ultimately, wherever they play out, the vicissitudes of global relations should very seldom compel us to embrace or disregard a particular economy in its entirety. They should instead remind us why there is much to be said for taking a more granular approach to investment decisions.
For instance, since tariffs are imposed only on exporters, it ought to be prudent to explore the brightest prospects among businesses with a domestic focus. This is likely to steer us towards the lower end of the market-capitalisation spectrum.
Although routinely under-researched by the wider investment analyst community, smaller companies are key to long-term growth in many Asian markets.
They have frequently outperformed their large-cap counterparts over time, yet these hidden gems routinely attract the attention only of specialist investment teams that are able to benefit from on-the-ground insight.
Informed decisions versus sweeping generalisations
Three of Aberdeen Asia Focus plc’s 10 biggest holdings are Indian businesses that fit this bill. Our team believes each represents a compelling example of domestically focused growth.
The first is Aegis Logistics, which is the country’s number-one oil, gas and chemicals logistics company. Founded in the 1950s, it is also India’s main importer and handler of liquified petroleum gas – a crucial component of the shift to cleaner energy.
The second is KFintech. Based in Hyderabad, the nation’s principal technology hub, it is tapping into India’s tech-enabled financial revolution by offering an array of financial infrastructure services and digital solutions to local asset managers.
The third is Affle, a consumer intelligence platform that completed its IPO six years ago. Drawing on India’s newfound hyperconnectivity, it helps marketers engage with target audiences and drive transactions.
In our view, the fact that these companies are unlikely to be affected by outbreaks of trade conflict merely adds to their appeal. They tick the box both in terms of what we look for at a more granular level – quality, excellent leadership, capacity for growth – and in terms of the macroeconomic backdrop.
Adjusting portfolios in response to external events is part and parcel of active management. Volatility and uncertainty can demand caution or create opportunity, so it is wise to be flexible.
But knee-jerk, sweeping generalisations rarely prove to be the best course of action – even amid the non-stop thrills and spills of the Trump 2.0 era.
Gabriel Sacks is co-manager of Aberdeen Asia Focus plc. The views expressed above should not be taken as investment advice.