Why should investing be very different from buying tomatoes?
Rishi Patel was born and raised in Bombay, which is also home of the oldest stock exchange in Asia. The college that he attended is located across a field from the exchange, so perhaps it should be no surprise that he was drawn to investing at a young age.
Without sufficient funds to participate in an IPO, Rishi pooled his money with some friends, and together they made their first investment. The IPO was a success, doubling shortly after it hit the boards. Rishi was hooked, and that experience marked the starting point of his journey in investing.
However, he didn't dive headlong into a career in funds management. Instead, he took his first job at General Electric in 2001. He describes the experience as his real-world MBA and says that working inside a big company during the tech wreck taught him the real value of businesses that can generate cash.
Rishi joined LGM in 2006 and is currently the lead portfolio manager for the BMO LGM Emerging Markets strategy. In this interview, he explains how picking stocks is like selecting fruit at the markets and articulates what he perceives to be the opportunity for investing in Emerging Markets.
How would you tell people who are not familiar with industry jargon about your philosophy for investing?
Friends and family do ask me about what my views are and stock tips and stuff like that. And I tell them,
"I can teach you how to fish, and it's very simple. You just focus on cash. You focus on companies which you deal with on a day to day basis. Whether it is a chocolate that you like, or a beverage that you like, or a bank that you like, or that you have experienced yourself as a customer. If you like the services, then look that bank up or look that stock up. If you like what you see, then go ahead and make that investment."
I also give the example that you shouldn't invest based on any hot tips given by your broker, or by your driver, or your cook. In India, you have a lot of vegetable markets. When you go to buy a tomato, and you see some vendors selling tomatoes and from a distance and you say okay, maybe that vendor seems to have the better-quality tomatoes.
You go to that vendor, and then you cherry-pick your tomatoes, you look for the colour, you look for the firmness, you look for the quality of the tomatoes. Then you haggle with that vendor for a 10% or 20% discount.
I tell them that when it comes to investing, it should be the same. You look at a company from a distance. Then you go closer, then you evaluate the quality, and then you haggle for the price. Why should investing be very different from buying tomatoes? But when it comes to investing, what do people do? They look for the hottest tips over the phone from their broker or from their lift man or from their driver, or the cook or their friend. That's completely the wrong way of looking at investments.
How would you describe the state of play across Emerging Markets?
A bit of a backdrop is essential to understand the Emerging Markets. The first point is that the investment case is very, very simple. But just because it is simple, that doesn't mean it's easy.
The simple case is that it is 80% of the world's population. It is 60% of the world's GDP, yet it's only 15% of the free float-adjusted market cap. 80, 60, 15. So the investment case is straightforward, but how to exploit that is the trickier part.
There are 24 countries in Emerging Markets, therefore 24 currencies, 24 political dispensations, 24 interest rate cycles, inflation cycles and commodity cycles. These are not homogeneous blocks of countries put together, but they are spread across the world, and therefore a nuanced approach is required.
A lot of those companies are either owned by the state or large controlling and influential families. And therefore, as minority shareholders, we should be absolutely cautious of first protecting capital and then growing capital. So capital preservation is very, very important.
The second aspect is that in emerging markets there is a cluster of currencies, and at the end of the day, we are here to generate hard currency returns, net of fees. So that hard currency aspect is something which is very, very relevant. You might make a fantastic investment in local currency in an emerging market, but when you convert it back into the US dollar or Aussie dollar, then it doesn't really mean much.
What's the compelling case for investing in Emerging Markets?
It goes back to the simple way to look at this, emerging markets are 80% of the world’s population, it is a growing population, younger population, a population which is going to start consuming a lot more. And so, you want to invest in companies which benefit from that underlying structural growth of those emerging markets. That is the structural of longterm investment argument for Emerging Markets.
There are about 25,000 listed companies in Emerging Markets. So, it is a vast pool of companies to select from and very, very diverse. Even if you look at simple banking, some of the banks in Emerging Markets are at the cutting edge of technology and using digital banking and get the runway for growth.
Only one out of four Indonesians have access to a bank branch. That is a structural trend to invest in.
For a country of 1.2 billion people, there are only about 60 million credit cards in India.
From a long-term perspective, from a 10, 20-year perspective, that is the investment case of Emerging Markets.
Have you got a specific example that highlights the opportunity in Emerging Markets and where you've uncovered some unique insights?
Our largest investment is a bank in India called HDFC bank. This bank has compounded capital at 23% in hard currency for the past 25 years under a single CEO. Yet the market share of this bank is only about 6 or 7% in India. This bank has 25% market share in credit cards, which might seem very, very high, but there are only 60 million credit card users in India.
HDFC has only about 15 million credit cards issued. If you go back in 10 years, I'm sure that number is going to be more than double.
Those are the real structural longterm drivers of growth, which we see in emerging markets, which we do not see in developed markets. And that really is the investment case.
Learn more about the opportunities in Emerging Markets
In developing economies, rising incomes and increasing levels of consumer spending fuel long-term growth potential. Embrace the emerging consumer. To find out more, click the 'contact' button below.
BMO Global Asset Management (Asia) Limited (ARBN 618067959), Pyrford International Ltd (ARBN 165504414) and LGM Investments Limited (ABN 19 381 443 479) are exempt from the requirement to hold an Australian financial services licence under the Corporations Act in respect of the financial services each provides to "wholesale" investors (as defined in the Corporations Act) in Australia. Pyrford International Ltd and LGM Investments Limited are regulated by the Financial Conduct Authority under UK laws, and BMO Global Asset Management (Asia) Limited is regulated by the Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.
BMO Global Asset Management (Asia) Ltd ARBN 618067959 is exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of the financial services it provides to wholesale investors (as defined in the Corporations Act) in Australia. BMO Global Asset Management (Asia) Ltd is incorporated in Hong Kong and authorised and regulated by the Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.
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