If you’re a long-term growth investor, you should be focusing on Asia. Everyone in the US loves to focus on the US stock market (home country bias) but valuations in the US are pointing to disappointing returns over the next decade. That’s not to say that there aren’t any attractive investment opportunities in the US markets, but global growth for the next 10 to 20 years will be driven primarily by Asia, with India at the center, and it should be a major part of your portfolio. See Walmart’s recent $16 billion investment in Flipkart (India) and Google’s recent $550 million investment in JD.com (China) as evidence.
The reason why is basic math. India (along with much of the emerging world) has a beautiful population pyramid where millions of people will be entering the work force each year for the next 20 years which creates a virtuous economic cycle. You will see demand/consumption for everything continually rise over the next two decades.
The Indian government has made huge strides over the past couple of years to ease regulations on businesses, de-monetized the financial system, implemented the Aadhaar and India Stack systems which are rapidly bringing the country into the age of technology and making it extremely quick and easy for Indian citizens to do things like open a bank account and apply for a loan, and is making vast improvements in infrastructure. All of these are setting the country up with a strong foundation for decades of growth.
A few decades ago, South Korea’s own growth story mapped out for us something called the S-Curve. This shows how demand does not grow in a linear fashion as an economy grows, but hits a point of acceleration and then starts to flatten out. Just about every emerging nation has followed this same S-curve. India today is on the edge of the point where demand accelerates, exactly where China was in 2001, so we can use the period of 2001 to 2011 as a general playbook. This was a period where we saw massive increases in demand for pretty much every commodity, not just oil. This is a big reason why I’ve been becoming so bullish on commodities again over the last year.
Source: Goehring & Rozencwajg
Not to mention that commodities relative to financial assets are now cheaper than they were in 2000.
Source: Goehring & Rozencwajg
The current strength in the US dollar and tightening of financial conditions is starting to put pressure on emerging market currencies, stocks and bonds. This is something that could continue to play out this year but I view this weakness as a long-term buying opportunity and will be buying as prices come down.
Emerging Market Currencies, Stocks and Bonds – 6 months
New Investment – Fairfax India Holdings
Last week I purchased stock in an investment holding company called Fairfax India Holdings. This is a holding company setup a couple of years ago by Prem Watsa, the founder and lead investor of Fairfax Holdings, to focus 100% on India. They invest in both public (stocks) and private companies, making it a pretty unique blend between a managed mutual fund and a private equity fund. You can think of it like a Berkshire Hathaway but for exposure to India.
Some of the company’s top investment holdings include:
- Bangalore International Airport – Fairfax India acquired a 38% interest in the airport at a price of 8.7x Free Cash Flow in March, 2017. Since, they’ve increased their ownership a couple of times to what is now 54%. The airport has increased revenues by approximately 20% per year from 2009 to 2017 and has expansion plans to increase passenger capacity from the current 20 million passengers per year to 65 million by 2028.
- Sanmar Chemicals Group: Sanmar is a private chemicals conglomerate that has been family run and has sales of more than $1 billion. They own subsidiaries that offer services in chemicals, engineering technology and shipping.
- IIFL Financial Holdings & 5paisa – IIFL is an India Fortune 500 financial services firm that offers loans/mortgages, wealth and asset management and capital markets services. Last October they spun off 5paisa which specializes in online and mobile application services for digital trading. In 2017, revenue grew by 33%, after-tax profit rose by 46% and book value increased by 17%.
Other investments include Fairchem Specialty, National Stock Exchange of India, and Saurashtra Freight (shipping). As you can see, their investments stand to benefit greatly from the increase in financial services, construction and improvement in infrastructure – all necessary services for a growing economy. You can read more about their investment holdings in their last letter to shareholders here.
Fairfax Holdings owns roughly 30% of Fairfax India and they have an incentive fee of 20% of profits over a 5% hurdle on a 3 year rolling basis. This isn’t something I would typically be a fan of but given their expertise in India, the unique opportunity this structure provides with private company ownership (something you won’t get from an ETF) and the quality of their current investments, I think it’s fair and a cost worth paying for access. To put numbers on it, the compound annual growth rate in book value per share over the last 3 years is up 17.1% gross of performance fees and 15% net of fees. I fully expect this investment to compound at an average annual rate in the mid-teens for the next decade or longer.
Since the private equity investments are not marked to market like stocks, we don’t know their true value today, but given the run the Indian stock market made in 2017, I can safely say that they’re worth more than the carrying (book) value that Fairfax is quoting. This means the true NAV of Fairfax India is most likely a good bit higher than the stated NAV. Similar to how Warren Buffett has a buyback limit on Berkshire shares of 120% of book value (for a similar reason of private company valuations), I view any price under 120% of Fairfax’s NAV (book value per share) as a good price to pay to buy shares. The book value per share as of December 31, 2017 was 14.46 which puts my buy price at $17.35 or lower.
Fairfax India is actually a Canadian company that trades on the Toronto Stock Exchange under the symbol FIH.U. If your broker has access to the TSX, you can buy the shares under that symbol. If not, it trades in the US over the counter (OTC) under the symbol FFXDF. Since I expect to hold this for years, I’m fine with the thinly traded shares OTC so I purchased FFXDF. I would caution anyone interested in investing in the company to buy this in a tax-deferred retirement account though. Being an investment holding company, it creates a bit of a tax nightmare for US investors if held in a taxable account.
Fairfax India – 2015 to Today
Thanks for following!
-Nick