Polar Capital’s William Calvert has been buying into the Indian energy sector in anticipation of a win for Narendra Modi in the country’s elections.
Mr Calvert, who runs two emerging market funds for Polar Capital, one focusing on growth and the other on income, said a win for Mr Modi could galvanise the power sector in India, which badly needs investment.
The manager pointed out that one of Mr Modi’s major achievements during his time as governor of the Gujarat district of India was to get power running all day, every day.
Many consider this a major accomplishment in India, where power is in short supply and the infrastructure needed to distribute the power is sorely lacking in places.
Mr Calvert has therefore bought into Coal India in the expectation that Mr Modi will win and devote resources to combating the lack of power, because, according to the manager, “power revolves around coal in India”.
Coal India is a state-run business that gets favourable rates for supplying coal to power stations in India.
Mr Calvert admitted that Coal India was “not the best-run business” but said it was still “highly respectable” and generated an attractive return on equity of 30 per cent.
He said there was a possibility the Indian government could sell a stake in the business to a large global mining company, which he said could be “hugely transformatory”.
While he hoped the election of Mr Modi would deliver long-term benefits for the Indian power sector, Mr Calvert said his expected election would also probably lead to a more immediate bounce in the market.
“We think [Modi’s expected election] will be treated well by the market, which has been through a number of troubles,” he said.
“The last government had not done a very good job and the hopes are resting on Mr Modi to turn things around.”
While he said the Indian market had performed very well recently and was now valued on a ratio of 14.8 times price to earnings and 2.6 times price to book, he thought there was “still scope for the market to be re-rated”.
He added that the depreciation of the rupee, which has led UK investors to lose money in Indian equities in the past year even though the market moved to an all-time high, is now at “fair value”.
The investment in Coal India is part of a general theme running through Mr Calvert’s portfolios at the moment, which is a concentration on emerging market infrastructure.
The manager is particularly looking to invest in infrastructure businesses in “countries that are making a concerted effort to reinvigorate growth”, because any effort to stimulate growth requires investment in infrastructure.
Mr Calvert said he was investing in Mexico as a result of plans for “substantial infrastructure spending”.
Manager sees value in Russia in spite of crisis
Aside from a foray into the Indian power sector, Mr Calvert has also recently been topping up his holdings in Russia.
The Russian equity market, which was already very cheap compared with other emerging markets on many valuation metrics, has been in free-fall recently due to the ongoing conflict in the Ukraine.
The actions of Russian president Vladimir Putin (pictured) in annexing Crimea, and Russia’s continued push into Ukraine, has led to economic sanctions being imposed by the developed world.
Investors have been fleeing the market in droves. However, Mr Calvert said he was still “happy” to maintain his overweight position in Russia.
He acknowledged the news flow and its effect on the market does “depress” him at times and that the market was “going through the storm right now”.
But he said: “I do not think it is time to throw in the towel and I am topping up a few names.”
The companies Mr Calvert owns are not the large state-owned businesses and the oil majors but instead “companies with good cashflow generation” that have been indiscriminately beaten up with the rest of the market.
