EM equities: Conversations in rural India
Two years ago in November 2017, the emerging markets team and I visited India. We wanted to see the impact of demonetization on India’s economy. This was a policy put through by President Modi in 2016 to filter out ‘black money’ and transition India towards a cashless society. We started from the India-Pakistan border in Punjab and drove down to visit the city of Lucknow in Uttar Pradesh and made a final stop in New Delhi.
This research trip saw us making a conscious attempt to visit the hinterlands in India. As more than two-thirds of India’s population lives in semi-urban and rural communities, being on-the-ground in these areas would allow us to understand how demonetization had affected lives and the broader economy. So instead of the large listed corporates that we typically invest in, we met up with company owners, paint dealers, farms, tractor companies, departmental stores and journalists.
Perspectives matter. Tune in to our insights.
Our conversations then revealed that cash-based transactions have reduced. More SME owners have opened bank accounts for employees and started paying them with cheques and bank transfers. There is also increased awareness of digital and mobile channels and a willingness to adopt them. All in all, there appears to be a permanent shift to towards the non-cash-based eco-systems.
The evidence of greater financial inclusion and more digital / mobile activities were noteworthy for us as we see strong parallels in other developed countries. China is already strong in fintech and e-payments and we see the trend also catching across Southeast Asia (especially Indonesia and Thailand) and Africa.
In our emerging market and Asian equity portfolios, financial companies, especially those who are adapting to digital channels are one of our key holdings.
China is strong in fintech and we see the trend catching up across Southeast Asia1
EM equities: fingerprints for loans
HFDC Bank is an Indian bank that we invest in our portfolios. The bank has all the ticks in the right places – strong balance sheets, low non-performing loans, and importantly, credit growth is growing strongly unlike its peers.
And when we put HFDC through our ESG framework, it stacks up pretty well too. Much has been written about the strategic vision of its management and it also ranks highly on our own governance checklist for transparency and disclosures. India’s financial industry has been besieged by scandals, but HFDC has generally made positive headlines in the media.
However, it is the social contribution from HFDC’s growth footprint that really shines. Over the last five years, it has penetrated small towns and rural areas with its one-man branches and digital platforms to provide basic banking services2.
Unbanked in India3
In a country where 20% (or about 191m people)3 are still unbanked / underbanked, this move has allowed scores of small companies and rural Indians to come into the financial fold.
Its microloans to farmers, to women, to marginalized families have enabled them to buy farming equipment, start small businesses and put children through schools.
The lender’s focus on digital platforms outside of urban areas has speed up the uptake and process. Villagers, often illiterate, and sometimes without paper identification, do not have to battle with long paperwork. With India’s national biometric identification system, HFDC can approve these loans through fingerprint verifications. The lender also deploys this biometric technology through motorcycle dealers and these 2-wheeler loans can also be disbursed in 30 mins.
The bank also consistently channeled profits back to villages. Its latest financial statement revealed that the bank spent about $61m5 through its formalised corporate social responsibility agenda - Parivartan, (change in Hindi) and has five umbrella programs in place. Under these programs, villages benefit from the installation of sanitation facilities to construction of irrigation plants to learning about broom-making for extra income and providing education to children.
Villages benefit from HFDC's corporate social responsibility agenda
ESG in EM equities: financial inclusion and a story of empowerment
For a good period, the rural population has largely been ignored by its peers. For HFDC, the strategy to set its footprint in small towns and villages has helped the bank boost margins and given it an edge over peers (especially in non-performing assets) that have wooed urbanites with credit cards and personal loans. Today 53% of its bank branches are in the India hinterland and continues to expand in these areas to support inclusive growth4.
To us, HFDC is a strong story for sustainable investing. Its social empowerment initiatives has brought real change to villagers and with that, this financial entity has also secured a strong growth future.
Back in India
Our team was down in India in November 2018. Like the trip in 2017, we focused on small towns and rural areas and visited Haryana, India. In the last few year or so, farmers have been buying more shampoo and other daily essentials, and the increase in consumption in villages have been higher than cities. This relative good fortune for villages has been helped in large part by good monsoon rains. We wanted to gauge how sustainable the good times will be in rural communities as many of our investee companies, like HFDC operate and rely on this broader ecosystem.
EM equities: A side note on ESG
These days, I’m often asked what our emerging market team thinks about ESG, how we’re embarking on this journey, is it part of our process? I see surprised faces when we reveal that environment, social and governance factors are significant considerations for us.
In our 32-point checklist, 14 questions are related to ESG. That’s over 40% dedicated to finding out about non-financial factors.
On the ground in Haryana, India, November 2018
These non-financial factors help us uncover potential hidden risks that are important when we assess companies. Understanding whether a company’s policy on waste disposal, how it enforces labour laws with suppliers and how it views shareholder rights can reveal potential liabilities that lie beneath P&Ls and financial ratios. We want to quantify these risks and discount these in our valuation. This way, we build a good margin of safety in our investments.
As the emerging markets region does not have a stellar reputation when it comes to sustainability issues, going on-the-ground to investigate these issues can provide valuable inputs. This is why we do more than meet with investee companies. Across our trips to India, Indonesia or Russia, we take time out to visit the countryside, speak with suppliers and small business owners. These meetings give us a wealth of insights into the bigger universe which large corporates operate and such insights are not easily gleaned from reports.
References to companies are not buy or sell recommendations.
EM equities – research trip 2019
Members of UBS Asset Management's EM Equities were in India again in September 2019. They were in Mumbai, meeting with CEOs and senior management of financial institutions.
- Projit Chatterjee, Senior Equity Specialist
- Kelvin Teo, Analyst, Financials
- Geoffrey Wong, Head of Emerging Markets and Asia Pacific Equities
- Urs Antonioli, Head of EM EMEA and Latin America Equities
- Manish Modi, Portfolio Manager, Asia ex Japan
- Princy Singh, Analyst, Consumer / IT services
Best Fund Manager, Equity – Asia Pacific ex Japan6
Manish is a Portfolio Manager within the Emerging Markets and Asia Pacific Equities team. He is also responsible for portfolio management and construction of regional Asia ex Japan equity strategies.
Manish is a member of the Emerging Markets Equity Strategy Committee and is based in Singapore.
Prior to joining UBS Asset Management in 2004, Manish was Head of Research for Asian equities as Pioneer Investment Management in Singapore. He joined Pioneer's Emerging Markets team in Boston in 1994, where he managed funds focusing on Pan-Asia, Emerging Markets and India.
Manish began his career at the World Bank in Washington DC, analysing the impact of developmental aid in South Asia