Feb 26/15 – India is no DUFF

2015-02-26 9am EDT  |  #Fairfax #FIH/U #gold #India #Modi #Prem Watsa

When macro tourists such as myself think about India, they often focus on India’s large role in the gold market.

We get lots of headlines when an Indian spends $200k making himself a gold shirt. (Someone should really let them in on a secret; gold is not the same as mithril and it won’t save you from the orc chieftain’s spear like it did for Frodo.)

The large role that gold plays in Indian society often makes that the sole focus of foreign analysts.

Yet, I think there is another Indian asset class that is not being sufficiently appreciated.

Although India is one of the original BRICS countries, during the last boom they were the DUFF – designated ugly fat friend. (Hey don’t judge me for knowing this movie – that’s what happens when you have a 15 and 12 year old daughter – thank goodness I have my 9 year old son to watch X-men movies with…)

India was viewed as a bureaucratic, incompetent, inefficient country when compared to their more dynamic neighbour China. Although India’s economy has grown, there has never been the same sort of enthusiasm from investors as there has been for China. Here is a chart of the Bloomberg Indian market capitalization as of percent of the world market:

Investors have viewed India as a second class growth opportunity. Until now…

Last year the Indians elected a pro-business leader intent on changing that. Now I know Modi isn’t all sweetness and kindness, but he is in the process of fixing many of the problems that have plagued India for the past couple of decades. He is intent on stamping out corruption and taking a much more pro-growth stance to policy, much like China did almost two decades ago.

The recent plunge in oil prices is also a tail wind at India’s back. They are the fourth largest importer of energy in the world. The lower cost will be a huge boom to an importer that has been struggling with inflation.

We all know the bullish arguments for India, but we have been lacking a catalyst. Modi is that catalyst and he is putting in motion the policies that will set up years of Indian growth.

I know that I am not early to this story, but this is such a long term opportunity, that six months or a year will not matter. India is set to become the next bubble, and the fact that it is already moving upwards is not an issue. Before this is all through, India will go from being the DUFF to the sought after beautiful girl.

Which brings me to the real point of today’s letter. One person who I consider the smartest investors out there recently launched a fund whose purpose is to take advantage of this coming bull market. Fairfax’s Prem Watsa, who knows a thing or two about investing, and also a thing or two about India – after all he is originally from there, recently floated a special fund called Fairfax India Holdings.

From the Globe and Mail:

Fairfax Financial Holdings Ltd. founder Prem Watsa has always seen major growth potential in his birthplace of India, and now he is putting money behind that vision with a new investment holding company that has already raised $500-million (U.S.).

Toronto-based Fairfax said Wednesday that it will sponsor and promote Fairfax India Holdings Corp., which will operate as a public company that invests in businesses focused on India's marketplace

"We've been in India for at least 15 years, but we've found that the amount of money we could invest given regulatory constraints is limited.

The opportunity in India is greater than our ability to invest alone so we decided to create a separate company to allow other investors to participate," Mr. Watsa said when reached by phone in Toronto. The company will be listed on the Toronto Stock Exchange.

Joining Fairfax are three cornerstone investors: Markel Corp., West Street Capital Corp. and certain funds and accounts of FMR LLC. They will contribute a total of $200-million, and receive 20 million shares. "We'll raise another $500-million in the marketplace. And it'll be from long-term investors," Mr. Watsa added.

Mr. Watsa said Fairfax has confidence in the "business-friendly government" of Indian Prime Minister Narendra Modi, who was elected in May. He has pledged to improve the lives of the 1.2 billion Indian people through urbanization, transport and technology investments. India's relatively young population with rising consumption and savings rates makes the country's demographics attractive to Fairfax.

That stands somewhat in contrast to Fairfax's global concerns about tepid growth, unstable markets in North America and Europe, and the possibility of deflationary pressures. At the end of Fairfax's third quarter, its investment portfolios of common stock were 79 per cent hedged.

The focus of the new firm will be investing in India across major sectors including consumer goods, energy and financial services. The firm said it will target public and private businesses with strong management teams that have a lengthy track record - a model similar to Fairfax's own. And Fairfax India plans to take either controlling stakes in the businesses, or positions of "significant influence."

I am a big Prem Watsa fan. Although he has a much different style of investing, I have always been hugely impressed by his ability to take an out of consensus view that really pays off.

Since listing, the fund has unfortunately being rallying. I bought a little early on, but not nearly enough as I did not anticipate the excitement to move the fund to a premium to NAV so quickly.

They issued stock at $10 and there were some fees with the deal, so the NAV is probably $9.70 or so. That means we are already trading at a 7% premium. I wish I had bought more when it was below issue, but I got too cute.

Yet with the world stock markets on fire, I think India has the potential of being a top performer in the months and years to come. Buying Prem’s fund is a chance to get in early on this coming boom. I am buying it and putting it in the drawer. I think the mistake will be selling this too early…