Hiren Dasani (Goldman Sachs): “India is the most promising market because it offers scale, growth and diversification” | Financial markets

South Korea and Peru are two economies that have, a priori, little in common, and a chasm separates them in terms of per capita income. But, for various reasons, both are in a mixed bag, that of emerging markets, which represent an opportunity for the most daring investors. At the head of this group is now India, a sleeping giant that can no longer be ignored. Hiren Dasani, co-head of emerging equities at Goldman Sachs and lead manager of the US bank in India, defends in a conversation with Five days the potential of these markets and, in the process, debunks some myths about this heterogeneous group, such as the excessive risk they entail. The interview took place a few days before the end of the long Indian elections, where President Modi revalidated his position, but with a smaller majority than expected.

How to approach investing in a group that covers such different markets?

There is much variety. We look at the MSCI emerging market index, where there are all types of countries. On the one hand, you have countries like South Korea or Taiwan, rich from a per capita income point of view, with more than 35,000 dollars, a figure higher than many developed ones, but which are still considered developing, either due to lack of free circulation of currency or by some restrictions on short sales. On the other hand, you have India, with 2,500 dollars per capita, or China, with 10,000. Different markets at different paces.

Furthermore, it must be taken into account that many of them are above all driven by their internal market. This is not the case of Korea or Taiwan, very connected to global growth, but it is the case of India, a domestic market driven by its young population and its infrastructure. Therefore, as managers, what we do is have an approach based on the meticulous selection of securities, rather than on sectors or markets in general: we look for strong businesses capable of generating great returns.

Wall Street is at record levels and the major stock markets are keeping pace. Why invest in emerging markets then?

Emerging countries give faster growth, because they normally start from a lower per capita income. In general, they grow at a rate of 4% or 5%, compared to 2% or 3% in developed countries. Then, if you think about the millennial population, which is the one that is going to drive consumption, the majority is in these markets, like China or India. If you consider that there is going to be a cycle of consumer improvement that is going to be driven by millennials, then again, these will come from emerging markets. The third variable I would point to is the supply chain, which is very global: Nvidia, for example, is a leading American company in semiconductors, but if you look, the entire chip supply chain comes from emerging countries like Taiwan. , China and Korea.

In addition, I would point to valuations: they are trading at a considerable discount compared to developed countries, especially the United States. Emerging countries are deeply undervalued on the stock market. And if they believe, as we do, that in the coming years profit growth in these markets will be similar to developed markets, the fact that they are now cheap makes them especially attractive.

And where are you seeing opportunities?

The most promising is India, because it offers a combination of growth, scale and diversification. There are few countries that offer this: growing at a rate of 11% in nominal terms (without discounting inflation), real GDP at 7% and inflation that stands at 4%. It is the fifth largest economy in the world. This is scale and growth. In addition, it has more than 500 listed companies with more than 1,000 million market capitalization.

What challenges arise for the country?

In India the average age is 25 years. I think the biggest challenge is being able to provide quality jobs to the huge young population. Ensure that there is adequate investment in education and health. Every month there are a million more workers, which means you have to create 12 million jobs a year. The country does not have an employment problem, at the moment, but it does have a low productivity problem. With 15% of the GDP still coming from agriculture and 40% of the population working in it, the challenge is to move this population to more productive sectors. To this end, the Government has implemented a series of important reforms in recent years.

And outside India?

We like Mexico right now, because it is benefiting from a number of initiatives that are helping international companies establish their supply chains there if they want to head to the United States. Greece also attracts our attention, because it has a positive macro environment, its rating has been revised upwards and consumption is performing well. In Asia, I would say Indonesia and the Philippines. The Philippines is a bit like India: it has a young, English-speaking demographic and an economy driven by consumption and services, something we like.

How do you assess the performance of Chinese companies?

I think the valuations in China are too low. It’s too cheap. And, in fact, so far this year it outperforms the US stock market. After three years of being behind, valuations are very cheap and that is an opportunity in the short term. It is also true that the economy is stabilizing somewhat. Or, at least, it is not deteriorating further. Bottom line: Although there are long-term concerns, good prices make the Chinese market attractive right now.

One of the reasons why BBVA wants to absorb Sabadell It is due to its excessive exposure to emerging markets. There is a general perception that they carry greater risk, is that correct?

It is important to differentiate between macroeconomic risk and that of companies in these markets, and how these are mitigated by a good regulatory environment. Regarding the first, it is true that emerging markets are very vulnerable to interest rates in the United States right now. But if you think about it from the point of view of a stock market investor, where are most of these markets? 70% is in Asia, and includes China, India, Taiwan and Korea. In Latin America there are other big ones like Brazil and Mexico. In the Middle East, Saudi Arabia or the United Arab Emirates and, in Eastern Europe, Poland or Hungary. Seen this way, the large emerging markets are quite stable: whether because of their deficit, their inflation or their reserves. To give an example: China, Korea or Taiwan are in surplus right now.

And at a regulatory level?

Here comes the issue of excessive private debt and lax regulation, which allows financial institutions to take more risks. The good news is that emerging market banks have historically been much more regulated than developed ones, which have been allowed to do things more easily, like large mortgages. In emerging countries, it is very difficult to grant a loan for 100% of the value of a house, something that has been very common in developed countries until not long ago. The same thing happens with derived products. The headlines may say otherwise, but the reality is that emerging market financial sector regulation is much more robust.

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